As mortgage rates slip, when does it make sense to refinance?

The deluge of home sales and refinancing has slowed down. Now, a drizzle of homeowners has begun a second round of refinancing. A year or so ago, these people got themselves out from under on 14 percent mortgages and into the 11 or 12 percent neighborhood.

Since then, mortgage rates have slid below 10 percent. At some places, 30-year fixed mortgages are close to 9.25 percent.

At this level, even people who refinanced a year ago are thinking about going through the process again. The savings may not be so large this time, but if they plan to stay in the house for several years, those savings are worth the effort.

``Even three-quarters of a percentage point may save $40 a month,'' or $480 a year, says Victoria Davenport, a loan supervisor at Pioneer Financial, a Boston-area bank. ``Over a long period of time, that money will add up.'' Ms. Davenport says she has seen a few customers who refinanced their mortgages a year or so ago come in and ask about doing it again.

But is three-quarters of a percentage point enough? In the past, all the ``rules of thumb'' have declared that your new rate should be at least two percentage points lower than your old one, to save enough on monthly payments to make up for the expense of refinancing, which can include the application fee, points, and legal expenses.

James Follain, director of the office of real estate research at the University of Illinois at Champaign, thinks three-quarters of a point is plenty of reason to refinance. The standard rule of two percentage points, he notes, usually comes with the advice that you stay in the house at least two years after refinancing.

Well, many people stay in their houses much longer than that, he says, so if they have the chance to grab a lower rate now, they should do so.

``The key is how long you're going to stay there,'' Dr. Follain says. The National Association of Realtors says the average family stays in a home six to seven years. Of course, if you've already been in the house three or four years and you think you might be moving in another three or four, you should carefully examine the numbers before going through the time and expense of refinancing.

But if a homeowner is going to stay in the house eight years after refinancing, a lower differential will work, Follain says. He assumes you're not paying more than 2.5 percent in points and a $200 application fee.

But Forrest Pafenberg, an economist in the real estate finance division of the Realtors Association, believes people should not abandon the two percentage-point rule - especially when interest rates are lower.

``The level of savings one gets by going from a 14 percent mortgage to a 12 percent is much greater than what you get for going from 12 to 10 percent,'' Mr. Pafenberg says. Thus, refinancing a second time may not save as much in monthly payments as it did the first time.

``I think it's foolish to go for refinancing'' when the new loan is only a point or so less than the old one, he says. ``You're not getting the payback that's needed to cover the costs of closing.'' He does agree that if you're going to be staying in the house at least eight years after refinancing a difference of one point or less may work out.

Pafenberg is concerned that some people who are refinancing may be doing so in order to keep the house. They have taken on additional debt since they bought it and need the lower rate to meet all their monthly payments. If this is the case, a better long-term solution might be a good financial counseling session. Refinancing may still be helpful, but there could be other patterns of spending or of insufficient saving which also need correcting.

In addition to a lower mortgage rate, there is another advantage to refinancing now: It's probably faster. ``If it's a clean mortgage, we can turn it around in 21 days,'' Pioneer's Ms. Davenport says.

That's pretty fast, Follain says. But the big crunch for banks and mortgage companies is over, he notes, and many of them still have strong loan-processing staffs that can handle mortgages much faster than they could last spring or summer. So you may be able to get a refinancing processed before year-end, if necessary.

If you do decide to refinance, your lender may mention an adjustable-rate mortgage (ARM). That may seem foolhardy, especially with mid-teen mortgage rates fresh in your memory, but for the next year or so, many economists feel interest rates are going to stay down. So an 8.5 percent adjustable rate would make for lower monthly payments.

If interest rates rise, of course, you could wind up paying more, but perhaps you could refinance again. If rates fall, the rate on your ARM would follow, and you wouldn't have to go through the trouble and expense of refinancing.

Some lenders tie their ARM rate to an index based on Treasury securities, while others used a so-called cost-of-funds index published by Federal Reserve banks.

This cost-of-funds index is based on the rates savings institutions pay on certificates of deposit. So if these institutions have to raise CD rates to attract money, it would probably mean higher mortgage payments down the line, though it is considered less volatile.

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