Question: I currently have an adjustable-rate mortgage for a home I purchased a year ago. Now the rates are increasing every other month. Someone suggested I refinance for a fixed-rate mortgage. How does this work? What happens to the previous mortgage and private mortgage insurance?

-- Sybil Eady, Philadelphia

Sybil: Hell is probably pretty crowded right now, but I hope there's a special circle reserved for lenders who make low-interest, adjustable-rate mortgages without adequately explaining how they work and what their drawbacks are.

And I don't mean just handing you a written form along with the mountains of other paperwork you receive when you apply for a loan. I mean talking to you about what could happen under worst-case scenarios -- until you understand your risks clearly.

Low-interest, interest-only loans and so-called "option" adjustable-rate mortgages (ARMs) that allow buyers to make only minimum payments evolved over the last few years to deal with the "sticker shock" buyers felt when they saw how much home prices were ballooning every month.

Now home prices have stabilized, while rising interest rates are causing sticker shock. In fact, the non-partisan Center for Responsible Lending says 97.5% of borrowers who have teaser rates expiring on loans this year could face "payment shocks" of at least 25%, while three-quarters could face increases of 50% or more.

Incomes can't possibly keep up with these bump-ups. According to recent government statistics, real median household income has remained almost flat -- rising only 1.1% last year, to $46,326, from the year before.

So refinancing at a fixed-rate makes a great deal of sense. (I'm assuming that you qualify for such a loan.) Even though mortgage interest rates are higher than they were last year, they're still pretty low by historic standards.

When you refinance, the money from your new mortgage is used to pay off your old one. But before you retire your old loan, look over the paperwork to see if there are any prepayment penalties. You also should ask your current lender what the costs and fees would be to get a new loan at a fixed rate, and compare that package to what other lenders are offering. Some good places to start: www.eloan.com and www.fastfind.com.

When you apply for a new mortgage, document your income by providing tax returns, paycheck stubs or other proof rather than accepting a "stated income" loan that relies only on your word. Sure, it's a hassle, but doing so can save you between .125% and .5% on your interest rate, or $375 a year on a $300,000 loan, says Steve Krystofiak, president of the Mortgage Brokers Association for Responsible Lending.

Also, when a new loan is initiated, your house's value will be recalculated to current market values. If your home is worth more than it was last year, you might not have to pay private mortgage insurance (PMI) any more. (PMI, by the way, is insurance that you pay to protect the lender against your potential default if you have less than 20% equity in your home. It doesn't protect you against anything.)

To illustrate: According to the National Association of Realtors, Philadelphia-area homes appreciated 11.4% in the second quarter of this year over the same period last year. If your home's value went up that much, and if you put down a 10% deposit when you bought it, then your equity stake is 21.4% -- and you're free from paying PMI.

That's only a few dollars a month, I realize, but in this more somber housing environment, every little bit helps.