With mortgage rates rising, a growing number of borrowers are opting for adjustable-rate mortgages in an effort to minimize their monthly payments.

The ARM share of applications hit its highest level in nearly a decade this week, according to the Mortgage Bankers Association. But borrowers who opt for ARMs could face unpleasant payment shocks as interest rates rise.

Rates on 30-year fixed-rate mortgages have climbed by more than one percentage point over the past year, reaching 6.39% yesterday. But rates on adjustable-rate mortgages, which rise and fall periodically, haven't climbed nearly as much, because they're tied to short-term interest rates. Rates average just 5.51% on mortgages that carry the same initial rate for five years and then adjust annually, while rates on ARMs that adjust annually are 4.20%, according to HSH Associates.

That gap has sparked widespread interest in adjustable-rate loans. ARMs now account for more than 35% of mortgage applications, according to the Mortgage Bankers Association. The ARM share could climb above 40%, says MBA chief economist Doug Duncan.

For some lenders, the shift has been huge. At Washington Mutual Inc., ARMs accounted for 53% of loan originations during the first quarter, up from just 27% a year earlier. ARMs now account for 30% of mortgage originations at GMAC Mortgage, a unit of General Motors Corp., up from 20% two months ago.

But choosing an ARM just as interest rates are beginning to rise can leave borrowers vulnerable. The risks are particularly large for borrowers who have selected an ARM because the lower initial payments allowed them to stretch for a more expensive house. A borrower who took out a $450,000 mortgage that adjusts annually, for example, would start out paying just $2,240 a month at Friday's rates, according to HSH Associates. But the monthly payment could rise to nearly $3,500 if rates on one-year Treasurys jump to 6.3%, a level last seen in March 2000. That would push the rate on the one-year adjustable to nearly 9%. The financial markets expect the Federal Reserve Board to begin raising interest rates as early as next month.

ARMs have traditionally been used heavily by subprime borrowers. But much of the recent growth in ARMs is coming from borrowers with good credit, particularly people taking out large loans at a time when home prices are climbing.

Carmine DeChiara, a marketing manager, took out a $165,000 ARM that carries a 3.875% rate for the first three years when he bought a split-level townhouse in a Fort Lauderdale, Fla., suburb last month. "I wanted to keep my payment at a comfortable level," says Mr. DeChiara. If rates rise, he says, he may refinance or pay the loan off.

Financial institutions have helped fuel the demand with new products designed to appeal to borrowers looking to minimize their monthly payments. Chief among them are interest-only mortgages, which allow borrowers to pay interest and no principal in the loan's early years, and "payment-option" mortgages, which give borrowers four payment choices and often adjust monthly.

Lenders are also marketing ARMs harder. Countrywide Financial Corp. is using direct mail, phone calls and e-mails to tell consumers how an adjustable-rate mortgage can cut their monthly payments. Countrywide funded $15.7 billion in adjustable-rate mortgages in April, up 134% from April 2003. Seattle-based Washington Mutual is featuring ARMs in billboards, advertisements and seminars aimed at consumers. It plans to expand its ARMs lineup this summer. ARMs accounted for 53% of the company's loan originations during the first quarter, up from just 27% a year earlier.

The shift to ARMs is also being driven by higher home prices. One sign: Much of the growth in ARM usage is coming from borrowers taking out jumbo mortgages, as loans above $333,700 are called. More than 40% of borrowers with jumbo mortgages hold adjustable-rate loans, according to Fitch Ratings, up from just 18% two years ago.

ARMs are also especially popular in markets that have seen the fastest growth in home prices. In California, for instance, more than 77% of home buyers who took out a jumbo mortgage during the first quarter opted for an ARM, according to DataQuick Information Systems of San Diego, up from nearly 54% a year earlier. The median home price in California jumped 21% during the first quarter over a year earlier, to $340,500.

Many borrowers are opting for hybrid ARMs, which carry a fixed rate for the first three, five, seven or 10 years. A hybrid is "appropriate for someone who plans to stay in their home for up to seven years," such as a first-time home buyer or someone refinancing who plans to retire and move shortly, says Keith Gumbinger, a mortgage analyst with HSH. Interest-only hybrids, which are gaining in popularity, are riskier because the borrower doesn't build up equity in the loan's early years.

Other borrowers are choosing shorter-term ARMs, which are the most sensitive to rising rates. Washington Mutual, for instance, says it has seen a surge of interest in its payment-option ARMs, which adjust monthly. At Countrywide Financial, "the majority of the interest is in shorter-term ARMs," says Countrywide Senior Vice President Doug Perry. "It's driven by the fact that consumers are trying to find the lowest payment possible," he says.

Payment-option ARMs are particularly risky because they include a negative-amortization payment option that lets cash-strapped borrowers cut their payments to the bone. These loans work by letting consumers make a minimum payment based on interest rates at the start of the year. The downside is that, if rates rise, borrowers can wind up owing more than when they started.

Anyone considering an ARM should pay keen attention to the details. These include what index the loan is tied to, how much rates can go up in a single year and over the life of the loan, and how quickly the mortgage payments can increase.

ARMs got a boost in February when Federal Reserve Board Chairman Alan Greenspan said in a speech to credit unions that "many homeowners might have saved tens of thousands of dollars" had they held an ARM rather than a fixed-rate mortgage over the past decade as rates tumbled. Mr. Greenspan later pulled back from his remarks, saying he "did not mean to disparage" the 30-year fixed-rate mortgage.