Decades-low mortgage interest rates may be coming to an end, if money markets pay attention to changes in two key indicators: world markets and U.S. productivity. Mortgage interest rates have recently reached 10-month highs, coming perilously close to the psychological hurdle of 7.00 percent for benchmark 30-year, fixed-rate conventional loans. Since then rates have drifted down, but are still half a point higher than they were in May.

Homeowners with fixed-rate mortgages are happy because mortgage interest rates are still relatively low, and borrowers should be happy because the brief spike has dulled, but that doesn't mean interest rate hikes are over. So how should ARM holders feel?

Whether they are in a subprime loan or a low ARM rate that doesn't reset for another two or three years, anyone with an ARM should be concerned. Every one-eighth of a point adds approximately $25 to a monthly mortgage payment, and there's no way to know how fast and how high interest rates can go.

"The problem is that many ARMs due to reset this year will be doing so at a considerably higher interest rate," writes Brenda Spiering for LendingTree.com. "Not only have interest rates increased but the gap between fixed and adjustable rate mortgages has narrowed. Those who took out an ARM for less than 4 percent back in 2003 could see their mortgage rate jump to 7.5 percent after the adjustment."

What's driving higher mortgage interest rates? Bank rates. The Central Bank loans money to banks at a given rate. The banks then loan money to commercial interests and to consumers at a higher rate, at which they can make a profit. To control inflation, or the cost of goods, the Central Bank may raise its rates to cool the economy down. When the economy is stagment, the Central Bank lowers interest rates to stimulate buying.

One of the reasons so many people got into ARMs during the first half of the decade was that they were so cheap. You could buy more house for less money. But now, there's not as much as a gap between ARM rates and fixed rates, so taking out an adjustable rate loan is more of a risk.

Also, the era of low interest rates may be over. For example, The Bank of England just raised it's short-term rates to 5.75 percent, the highest rate in six years. Many economists believe that it will raise rates to 6.0 percent by the end of the year. In March, 2007, inflation in England was 3.1 percent, the highest in a decade, and the Brits have been trying to cool inflation by a series of rate hikes.

How does that impact the U.S. and mortgage interest rates? In order to attract investment in the U.S., our interest rates must be competitive, or investors will have no reason to put money in our banks. Almost certainly, interest rates will have to rise to match the rising interest rates of other nations and currencies.

At least that's the theory.

Another key indicator to look at is productivity. What the Federal Reserve Board considers when it eyes inflation is how much is being produced and what costs are offsetting that production. The average person might thing rising wages is a good thing, but to the Fed, rising wages are only good if production levels also rise.

The latest figures on productivity are that the U.S. is slightly down. According to the Bureau of Labor Statistics , wages rose, but productivity didn't rise. Further, a survey based on ADP payrolls data and employment in the U.S. private sector says jobs grew by 150,000 in June. That's the fastest rate in seven months.

Both bits of news sent bond yields higher and prices tumbling, as it appears more certain that interest rates will rise.

So for borrowers sitting on a generously low hybrid loan that isn't set to adjust for a few months or years, the question is - should you refinance?

It's hard to give up an four or five percent rate and come up with closing costs to refinance knowing your new fixed rate is going to be a 6.5, 6.75 percent or higher. On the other hand, you have to weigh your peace of mind. Is it worth several thousand dollars in closing costs to refinance to a fixed-rate loan? Yes, if you consider the worst case scenario -- that interest rates could adjust all the way to your permanent cap of five percent more. If you started at 4 percent, that's 9 percent.

Explains mortgage broker David Reed, author of Mortgage Confidential , Amacon, "Amortized over 30 years, $200,000 at 5.005 percent the P&I payment is $1,073. If it adjusts to its fully indexed rate to 8.00 percent, the payment shoots to $1,467. If there is a 2 percent cap on the initial adjustment the rate would only go to 7.00 percent (5.00 percent start rate plus 2 percent cap) ... that's $1,330."

Thirty-year fixed rates right now are at 6.625 percent and change. "That's $1,280 per month," says Reed.

Whether Hybrid ARM holders should refinance or not is a popular question, says Reed. "In reality, nobody knows where rates are headed. I don't make guesses -- educated or not -- with my client's mortgage payment and neither should you.There are simply too many things that can go wrong -- it could be some oil refinery in Nigeria getting blown up again or a factory suddenly lays off -- or hires -- a jillion workers."

So, Reed has one-piece of never-fail advice: "Assume whatever you decide, it will be the wrong decision. Which way would you rather be wrong?"

He explains, "Would you rather lock in now at acceptable rates or would you float another day and get something worse? If you're comfortable in the current market -- after all, if you're shopping or refinancing you've been following mortgage rates for a few months now -- then lock. It also helps you sleep at night without wondering what the markets might do the next day. Heck, you can always refinance.

"Lock. Sleep. Go buy new drapes and enjoy life."

With nearly $1.5 trillion in ARMs due to reset this year, that's a lot of folks going sleepless, and not just in Seattle.

Regardless of where you are, your ARM is bound to be resetting at a higher rate than you originated with your hybrid loan. If so, think on the bright side, suggests Spiering. Consider the following:

• You’ve benefited from a low initial rate. Remember, the fact that you chose a low-interest ARM means you’ve most likely already reaped the benefit of saving several thousand dollars a year during the first few years of your mortgage.

• Mortgage interest is usually tax deductible. Even though your payments may be increasing when your ARM resets, the fact that mortgage interest is usually tax deductible means there may be less net impact than you may expect on your overall finances.

• You can refinance to a fixed-rate mortgage. If you’re concerned interest rates may continue to rise and want the security of knowing your monthly payment won’t rise to an unaffordable level, you have the option of refinancing to a fixed-rate loan.

• Historically today’s interest rates are still low. Twenty years ago any mortgage under 10 percent was a great deal. Today’s rates are still historically low.

• You chose the right mortgage if you plan to move soon. Choosing an ARM was the right decision if it enabled you to save money during most of the years you lived in your home. Those savings should more than offset a short period of higher interest payments just before you sell your home.