Homeowners now have one less choice of insulation to choose from when they try to reduce their energy bills by insulating homes.

The choice: formaldehyde. The reason: the government's ban on insulation made with the substance went into effect Aug. 10.

The ban was ordered by the Consumer Product Safety Commission last February, after the commission concluded that this type of insulation posed a severe health risk to consumers. Chief among the commission's concerns were recent scientific studies that linked formaldehyde to cancer.

However, partly in an attempt to give the insulation industry a chance to adjust to life after the ban, the commission did not make the ban effective until last Tuesday.

The formaldehyde industry is appealing the ban, arguing that it is unjustified and unmerited based on the scientific studies to date. Nonetheless, a U.S. Court of Appeals in New Orleans refused last week to grant the industry temporary relief and delay the effective date of the ban until the court rules on the merits of the industry's petition.

As a result, any installation of urea-formaldehyde foam insulation, or UF-foam as it is commonly called, now is illegal. Any company that installs the insulation faces a $2,000 civil fine for each installation, up to a maximum $500,000. Criminal penalties are also possible if an installer knowingly and willfully continues to install UF-foam after being notified by the commission that he was not complying with the law. Criminal penalties incur fines of up to $50,000 or a maximum one-year jail sentence or both.

Even though the ban did not take effect until this week, the insulation industry said that the commission's vote last February already had curbed the sale of UF-foam. In the past few months, about 85 homes have been insulated with UF-foam each month, estimates Josh Lanier, executive director of the trade organization that represents installers. Before the commission's vote, UF-foam had been installed at a rate of about 1,700 homes a month, Lanier said, noting that that level already represented a sharp decline from the industry's high of 12,500 installations a month in 1977. The decline began shortly after the CPSC announced it was investigating UF-foam as a health hazard.

As many as half a million homes have been insulated with UF-foam since the mid-1970s as part of a massive government campaign to persuade homeowners to conserve energy. The ban, however, does not cover homes already insulated with UF-foam. CPSC officals advise consumers to leave the insulation alone if they have not experienced any health problems. If problems have occurred, then consumers must deal with them on their own, including taking such steps as ripping out the insulation.