American Security Bank will inaugurate today a varible rate mortgage for laons on single family residences in the District.

The decision by Washington's second-largest bank makes it the only significant commercial bank outside California to offer such mortgages, under which the interest rate charged consumers increases or declines with prevailing costs of money.

Bank of American, the nation's largest bank, began a similar variable mortgage program last October and has been followed by Wells Fargo Bank, also based in San Francisco.

State-chartered savings and loans associations or mutual savings banks in a handful of states have pionered variable rate mortgages in this country, primarily in California.

Variable rate mortgages have been commonly used in Europe for years, but without ptotective ceilings beyond which the rates cannot rise. The sharp inflationary pressures there have made home mortgages too costly a burden for some Europeans and Britisns. D.C. law, however, prohibits mortgage rates above 10 per cent.

Federal Home Loan Bank Board rules currently prohibit federally-chartered S&Ls from offering variable rates loans, which have been opposed by some consumer and labor groups as forcing higher interest vharges on home buyers.

But Carleton M. Stewart, American Security's chairman, said yesterday that variable mortgages "give the well-informed borrower the opportunity to make a judgement about future rates and to benefit if his judgment is correct."

Senate hearings on variable rate mortgages are planned for Oct. 6 and 7, at which time the bank board is expected to offer results of a year-long study it has conducted.

An side to Sen Alan Cranston (D-Calif.) said yesterday that California law includes "some degree" of protection for consumers from potential abuses with variable rate plans but expressed surprise that such a mortgage will be offered in the District, where no law exists.

According to Gordon Matthews, of American Banker, a trade newspaper, variable rate mortgage volume at Bank of America through last May accounted for 16 per cent of overall single family mortgage lending.

Both Bank of America and American Security are offering the variable plan as an option to potential borrowers.

At first, American Security will offer the variable mortgage only on D.C. properties. If there is demand for the service, said executive vice president William C. Yowell Jr., the plan could be extended to the Maryland.

Because Virginia has a ceiling of 8 per cent that would apply to variable mortgage interest rates, such a plan could not be offered in that state, Yowell said.

Mortgage offered would be for home purchases with the total mortgage being $75,000 or more. Variable mortgages would be available at 0.25 per cent below the current fixed rate for conventional mortgages.

The interest rate would remain constant for the first year and be reviewed semiannually thereafter. Changes in the interest charge will be determined by the average cost of funds for S&Ls in this region of the U.S. on a semiannual basis.

If a rate change is made, it will be limited to 0.25 per cent semiannually. The borrower will be notified 60 days in advance of the increase or decrease.

However, monthly payments will not change. Rather, American Security will extend the life of the loan up to 10 years to cover any increases in interest costs. Maturity of the variable lloans will befrom 15 to 30 years. Prepayment may be made without penalty.

Given the current interest rates in metropolitan Washington of about 8.75 per cent to 9 per cent for mortgages with down payments of 20 per cent, plus extra fees in many cases, the variable plan would start out with a rate of 8.5 per cent to 8.75 per cent.

American Security officials said the new plan may be attractive to customers who anticipate increased incomes or who wish to own an "assumable" mortgage if the person relocates or changes homes.