It's the thing to do! Record numbers of people are refinancing! Act now before the train leaves the station!

These come-ons bombard homeowners, spurred by mortgage rates that hover near the lowest level in three decades. In many cases, refinancing is quick, painless and sensible, but there are plenty of reasons to forego refinancing. Indeed, those with second mortgages, a lot of debt or trouble with bills may find they'd pay more by refinancing than by sticking with the loan they already have.

Better to sit tight?
"The first thing that comes to mind is, 'Is there enough equity in the property?'" says Paul Tobin, market manager for the mortgage arm of Fleet Financial Group Inc. "A second thing would be the borrower's own personal qualifications, and that goes back to standard credit underwriting."

If people expect to be able to save money, he adds, "They need to maintain a positive credit history and maintain a relationship between their debt level and their income level."

Riding high
It's difficult to argue that many homeowners aren't having the time of their lives in this market. Borrowers with consistent on-time payments, only one lien on their property and relatively small amounts of debt have had the chance in 1998 to knock as much as hundreds of dollars off their monthly payments. Over time, that will mean thousands less spent on interest.

But the last couple of years also have seen lenders carpet-bombing homeowners with offers of home equity loans and lines of credit. Some companies, in fact, have advertised loans of up to 150 percent of a home's value. Meanwhile, recent economic data indicates that people are saving less of their income, even as the amount of available credit has risen astronomically. All told, these and other factors suggest many people will run into trouble when they go back to the mortgage company.

How it works
Consider how a refinance loan works. In most cases, lenders sell these products to Fannie Mae and Freddie Mac, which repackage them as securities for sale to investors. These quasi-governmental agencies provide a large part of the money for the mortgage industry, and they have relatively strict guidelines for the loans they buy.

With a plain-vanilla "rate and term" refinance, in which someone has only a first mortgage and wants nothing more than to change its terms, lenders can rework the loan after the borrower reaches 10 percent equity, Tobin says. That means somebody who put 5 percent down on a $100,000 home would qualify to refinance after the balance hit $90,000. That would take slightly more than four years with a 30-year fixed rate of 6.75 percent.

Difficulties set in
However, it's more difficult for people who have obtained a home equity loan within the past 12 months to refinance their first mortgages. Lenders restrict overall debt, including the first mortgage and the second, to 75 percent of the home's value if the ink is still damp on the home equity loan. At the 6.75 percent 30-year fixed rate, it takes nearly 13 years of regular payments to drive a $95,000 first mortgage down from 95 percent of the home's value to the desired 75 percent, to say nothing of the second mortgage debt. So, someone in this situation couldn't take advantage of falling rates for a while.

Given that rates are so low, many borrowers may want to eliminate their home equity loans entirely by rolling those debts into larger first mortgages. However, to do that, they must have had their home equity loans for at least 12 months and their total mortgage debt level can't exceed 90 percent of the home's value, says Dan Reed, vice president and district manager for Source One Mortgage Services Corp.

"That's a lot of the business right now," Reed says. "People are combining."

Many who combine loans end up back where they started with private mortgage insurance, an extra payment they must make when they borrow more than 80 percent of a home's value. That's because combining a $15,000 second mortgage balance with $75,000 worth of PMI-free first mortgage debt raises the overall load on a $100,000 home to $90,000 -- above the 80 percent level.

Basic standards still apply
And refinancing customers face the same credit and debt-to-income standards they did when applying for the original loan. This can spell trouble if a once-stellar customer has made a few late payments or allowed the credit card balance to skyrocket.

"The major reason is really bruised credit or impaired credit," says Bill Carlile, a branch manager in Novi, Mich. for Norwest, which is now part of Wells Fargo & Co.

Lenders also typically compare housing debt and overall debt to an applicant's gross income when deciding whether to make a loan.

"The conforming, Fannie Mae/Freddie Mac standards on a 30-year fixed say housing debt-to-income is not to exceed 28 percent: Their principal, interest, taxes and insurance would need to be below 28 percent of what their gross monthly income is," Carlile says. "The second 'bottom ratio' is complete debt load, and it has to be below 36 percent."

Never say die
Experts are quick to point out that none of this will exclude someone from refinancing entirely. There is almost always someone who will make a loan. The devil is in the details: Nonconforming borrowers may find the rates they qualify for today are either higher than the rates they already have, or not low enough to make refinancing worthwhile.

Bankrate.com historical records show that people who obtained a standard 30-year fixed mortgage for $100,000 in October 1994, would have paid interest at a rate of about 8.85 percent. If they stayed away from home equity loans and maintained good credit, they would qualify today for a loan with a rate of about 7.13 percent and no points, lenders say. Payments would drop to $651, saving the customer $143 a month, and it would take just 10 months to recoup the approximately $1,500 in closing costs.

However, if borrowers run into trouble before refinancing, their credit can drop from "A+" to "B" or "C" -- where rates run about 1.5 percent to 2 percent higher, Fleet's Tobin says. That makes refinancing kind of a hard sell, considering someone's interest rate might go from 8.85 percent to 9.13 percent.

Some lenders offer special programs that provide conforming rates to nonconforming borrowers, however. Typically, these loans are available only to the lender's existing customers, people who got their first mortgage there and people whose loans the company is servicing.