Jerry Purdy, 40, had been hoping for two months to refinance the 12 3/4 percent Veterans Administration loan on his Herndon house when the VA last week dropped the maximum interest it charges on home mortgages to 9 1/2 percent, the lowest in nearly seven years.

"We just said 'Thank the Lord!' " said Purdy, an official with the Interior Department. "It was much more of a drop than we ever expected." With five young children, "It will sure help with the groceries," he noted.

Purdy is one of thousands of Washington area residents who are taking advantage of the sharp drop in interest rates to refinance their mortgages and shave hundreds of dollars off their monthly payments.

Since the end of December, the deluge of refinancing applications has been so large that area lenders say they are turning away business and are backed up on the loans they have accepted.

"The business has literally tripled, and it hasn't slowed since. It would probably be more if we had more telephone lines," said Drew Secosky, who runs a mortgage office in Springfield for Dominion Federal Savings & Loan.

"There just aren't enough hours in the week for the mortgage banking industry to handle all the loan requests that are coming in," said Thomas Edmunds, a vice president at United Virginia Mortgage Corp. "I have never seen it quite happen to this extent, and I've been in the business eight years. If I'd been in the business 30 years, I think I could say the same thing."

The reason for the rush is the comparatively low rates mortgage banks and savings and loans are offering on 15- and 30-year fixed-rate mortgages. Those rates have been falling steadily since the summer, with the Washington area average settling in the 10 percent- to-11 percent range in February, according to Victor Peeke, who publishes a report tracking area rates. And a number of area lenders have recently dropped their interest rates below 10 percent.

The industry rule of thumb is that homeowners who can reduce their mortgage rate by 2 points should consider refinancing. Almost anybody who took out a mortgage in the last six years, when rates danced in the 12 percent-to-15 percent range, should consider refinancing the loan, say real estate officials. Even taking into account the fees charged for refinancing, they say, thousands of dollars can be saved by paying a lower rate.

"Anyone out there with a loan over 12, 12 1/2 . . . who doesn't refinance is an idiot," said Don Denton, an area real estate agent.

David Baer, Annandale branch manager for Perpetual American Mortgage Co., said that his office typically gets 10 to 15 applications a month for refinancing. In February, he said, his office processed about 100 such loans, and the high volume is continuing as interest rates continue to plunge.

Last Monday morning, the first working day after the VA cut its mortgage rate, the receptionist at Baer's branch took 200 telephone messages, not counting the telephone calls that got through to loan officers. "She probably got 400 calls in all, and it's been that way all week," said the beleagured Baer.

The scene is similar elsewhere. Mortgage lenders and savings and loans report that they are getting two to four times the normal requests for refinancing. A spokeswoman for the Mortgage Bankers Association, a trade group, reported that a quick survey last week of major lenders around the country showed that typically one-third of the new loans that they are processing are for refinancing, compared with one-fourth last year.

For mortgage bankers, the extra business represents pure profit. They collect fees for each loan they process -- "points," as they are known to borrowers -- while they usually sell the loans in turn to the Federal National Mortgage Association, the Federal Home Loan Mortgage Corp. and other institutions in the secondary market.

For savings and loans, however, the wave of refinancing may be both a blessing and a curse. While in the short term it could boost their fee income, it will also saddle thrift portfolios with loans paying lower interest than the mortgages currently on their books. The financial impact could be particularly painful for some institutions if interest rates start back up again, leaving the thrifts with long-term, low-rate mortgages, industry officials say.

"There's no question that over a long period of time it can reduce income for those heavy in real estate," said the president of one local savings institution. "But we're not talking about a catastrophic situation," he added, noting that thrifts are paying depositors less as a result of lower rates.

Meanwhile, though, lenders are just trying to keep up with the wave of requests for new loans as they hire extra staff members to deal with the increased telephone calls and clerical work.

Edmunds of United Virginia said he had scheduled a meeting for next Saturday to take 50 to 100 refinancing applications on a mass, production line basis. Normally, he said, it takes 30 to 45 days to process such loans, which often demand up to an inch of paper work. Edmunds said he hoped to complete the laborious process of checking credit, getting appraisals and taking other necessary steps in less than 60 days.

Baer of Perpetual American said he is charging a 1 percent application fee -- to be refunded at the closing of the loan -- to separate the serious customers from the curious. Some mortgage bankers are reported to be taking requests for refinancing from existing customers before they deal with other applicants.

"People call asking whether they can come in and talk about refinancing, and I say no," Baer said. "I explain to them that I don't have the time."