With mortgage rates falling below 10 percent for the first time since 1979, many homeowners are asking themselves if this is the time to refinance their homes to take advantage of the lower rates.

Lenders say that nearly everyone who bought a home in the last seven years should consider refinancing, because interest rates are dropping to single-digit levels. Whether it is the right move for any individual at this point, however, depends on many variables, including an individual's tax bracket, savings, need for cash and plans.

Generally, there are two rules of thumb for figuring out whether this is the right time to refinance:

*First, there should be at least a 2-point difference between the interest rate on an existing mortgage and the rate one could get with refinancing.

*Second, a homeowner should be able to recover the cost of refinancing within two to three years.

With many lenders now offering interest rates as low as 9.5 percent, anyone paying 12 percent or more on a home mortgage, or anyone with an adjustable-rate mortgage, should take a hard look at refinancing, industry experts say. Lenders caution, however, that a family should consider refinancing only if they plan to stay in their house for at least three to five years. There is no point in shouldering the costs of refinancing if the homeowner is not going to stay in the house long enough to reap any of the benefits.

The cost of refinancing a house breaks down into two categories: settlement fees, including things such as a title search and recordation taxes, and discount points, the up-front interest the lender will charge for the loan. The total cost usually is between 4 and 6 percent of the loan amount, or $4,000 to $6,000 on a $100,000 loan.

"When you refinance your house, you are getting a new loan and you will be required to pay for many of the same procedures you paid for when you got your original loan," said Thomas Edmonds, vice president and regional manager for United Virginia Mortgage Corp.

Although different lenders will ask for different items, generally one can expect to pay about $450 to $600 for a new title search and title insurance; about $20 to $50 for a new credit check; usually 0.5 percent of the loan amount as a review fee for the bank's attorney or the settlement attorney; about $100 to $300 for a new appraisal of the property; some local recordation tax; and, possibly, a prepayment penalty for paying off the original loan early.

In addition, lenders may require a new survey of the property, about $125; a new pest inspection, about $45; and a report on whether there are any liens or judgments against the property, about $40.

"Generally, the settlement costs average about 2 to 4 percent of the loan amount," said Tom Marder, a spokesman for the Mortgage Bankers Association of America. "The discount points generally run about 2 percent."

To decide whether to refinance, first determine what interest rate one could get and how many discount points lenders are charging. The lowest interest rates usually carry the highest number of points. Each point is 1 percent of the loan amount, so the difference between 2 points and 4 points can be substantial.

Next, determine the extent of the settlement costs. Talk with lenders to see what they would require and to a real estate attorney or local tax office to see what local taxes will be charged. Add the settlement costs and the discount points for the total cost of the refinancing.

The next step is to compute the savings under the new loan. Compare current monthly payments with what payments would be at the new rates lenders are offering. A homeowner will need an amortization table to look up the monthly payments for each interest rate. Subtract the annual payment under the new loan from that of the current annual payment.

To figure how long it will take to recoup the refinancing cost, divide the savings into the costs.

In an example put together by the Mortgage Bankers Association for a typical area family with a typical loan, the annual savings on refinancing an $80,000 mortgage from a rate of 13 percent down to 10 percent would be $2,194.83. If financing costs were $4,000 (5 percent), it would take that family 22 months to recover their costs.

Taking into account the family's marginal tax bracket changes the formula, however. With the lower-interest loan, the family will be paying less in interest and getting a smaller tax deduction. Therefore, the actual after-tax savings from the lower-interest loan will be less, and it will therefore take longer to recover the refinancing costs.

If the family in the example were in a marginal tax bracket of 40 percent, they would pay $2,406.45 less interest the first year if they refinanced their 13 percent loan down to a 10 percent loan. They then would have to pay $962.58 more in taxes the first year with the lower-rate loan. Because the interest payments on an amortized mortgage are front-loaded, they gradually would pay less and less interest and get less and less of a tax deduction over the years.

For that family, if after-tax savings are taken into account, it would take 39 months to recoup their refinancing costs. The rule of thumb is that the higher the tax bracket of the homeowner, the longer it will take to recover refinancing costs.

For Warren and Carole Dunn, an area couple considering refinancing their $190,000 mortgage from its current 12 3/4 percent rate down to something lower, the after-tax savings are not low enough for refinancing to be worthwhile.

"It came close, but even if I could get a new loan at 9 1/2 percent, it is not worth it for me," said Warren Dunn. "If rates come down just a bit more, however, then I might do it. At this point, however, it's not going to work."

Prepayment penalties -- fines for paying off a loan early -- also can add to the cost of refinancing. Maryland prohibits such penalties, but the District allows lenders to charge a penalty for loans less than three years old. Virginia also allows prepayment penalties of up to 2 percent of the amount of the prepayment, although if the loan is less than $75,000 the lender can only charge a 1 percent penalty.

Homeowners interested in refinancing an adjustable-rate mortgage should consider whether their loan is scheduled to adjust up in the future (some ARMs, particularly those given at low teaser rates, are written so that they may be adjusted upward even when rates are coming down) and how long they plan to stay in their home. Lenders also say that persons with older ARMs, written before the consumer-protection provisions were devised, might want to refinance just to get a loan with less risk.

Other things to consider when refinancing are whether one has the money to pay the costs on hand or if it must be borrowed. One should figure in the cost of borrowing the money and the interest that could be made if the money is reinvested instead.

Some people may be able to get a larger loan than they originally had when they refinance, thus taking equity out of the house. If a house has appreciated in value or if a homeowner has paid down a considerable portion of the original loan, taking equity out during refinancing can be an inexpensive way of borrowing -- cheaper than a second mortgage or consumer loan -- for home improvements or a child's education.

With a larger loan, however, monthly payments may not actually decrease. Lenders also have some restrictions on taking out equity, particularly for people who have owned their homes less than two years.

Even if the homeowner thinks he should refinance, he still may have some trouble getting a lender to schedule an appointment. The drop in interest rates has triggered a landslide of refinancings, and some lenders say they are having to turn away business because they can not process all the loans.