NEW YORK -- Is now the time to refinance your mortgage?

The recent drop in interest rates suggests that you should consider it. Except for a brief dip in the winter of 1986-87, rates are at their lowest level since 1978. Homeowners can take a big chunk out of their monthly payment by getting a new loan to pay off the old one, taking advantage of lower rates.

Other homeowners who can qualify for refinancing might find it doesn't pay to do so. Those who plan to sell their home within a few years won't save enough to recover the financing costs, which can run as high as 4 percent of the mortgage.

Before looking at the bad news, let's look at the good news -- falling interest rates. Many lenders who were charging about 10.75 percent not too long ago now offer 30-year fixed rate mortgages for less than 10 percent.

Take a look at the savings from refinancing a $100,000, 30-year mortgage with a rate of 10.75 percent. The monthly payment is $933.48. If refinanced at 9.5 percent, the monthly payment drops to $840.85. You save $92.63 a month.

Assuming $3,500 is paid in refinancing costs, you make your money back in a little over three years.

Sounds great. The only problem is that you might be rejected by a lender if your home has fallen in value.

Here's why you might be turned down. Suppose your outstanding balance is $225,000 on a home you bought for $300,000 in 1986. Now the home is worth $255,000. Because lenders don't like to make loans bigger than 75 percent or 80 percent of the home's value, the biggest loan the home can support is $204,000, $21,000 less than what you now owe. To get the loan, you'll have to put up collateral equal to the shortfall.

The problem has become so severe that some lenders are prescreening would-be borrowers. Astoria Federal Savings in New York asks homeowners three questions before it takes an application: When was the home purchased? How much did it cost? How much was the mortgage?

The loan officer can usually tell from the answers whether the homeowner is a candidate for refinancing.

"Everybody will try to refinance, but they're going to be surprised," said George Engelke, chairman of Astoria Federal.

He said anybody who financed their home in 1986 or later by borrowing 75 percent or more of the home's value will probably be unable to refinance.

At Arbor National Mortgage in Westbury, N.Y., loan officers ask homeowners if their home has dropped in value since the purchase. If the buyer suspects it has, an Arbor employee drives by for a quick look at the home.

Unless Arbor is satisfied the home's value will support the mortgage, it stops the process right there, eliminating the need for a full-blown appraisal and saving the homeowner at least $350 in application fees.

But Peter Russo, president of Residential Mortgage Funding in Hauppauge, N.Y., says there are still plenty of people who can refinance, particularly those whose homes cost $250,000 or less. For most of those houses, the decline in value hasn't been nearly as great as for homes that cost more.

Even if you qualify, refinancing might not be for you. Lenders often say it doesn't pay unless you save 2 percent on the interest rate and can recover your refinancing costs in two years. The hassles aren't worth it, and, besides, you might sell the house before you have time to enjoy the savings, they say.

But Peter G. Miller, a Silver Spring mortgage expert and author of "The Common-Sense Mortgage," disagrees.

"That's a very convenient myth for the lending industry," he said. "Lenders will use the 2 percent idea as a way to prevent you from refinancing." Two years is also a bad standard because it assumes a homeowner will move out within a short time, he said.

Miller said the decision to refinance comes down to the particulars of the borrowers. If someone plans to stay in a house for a long time, even a small monthly savings makes it worth the trouble. If the person plans to move out quickly, refinancing might not make sense.

One can argue endlessly about the course of interest rates, but one can't argue about the advantages of refinancing. Consider someone who bought a house a few years ago with an adjustable-rate mortgage. After being lured with a low initial rate, or "teaser," of about 7 percent, the owner has since seen the rate adjusted upward to about 10.5 percent.

Not only can the homeowner get a lower monthly payment by refinancing, but he or she will also get the comfort of a constant payment, without fear of soaring interest rates.

The quest for steady payments has fueled refinancings in recent months. Mortgage lenders say most inquiries about refinancing have been from people with adjustable-rate mortgages.

"I think they want the comfort of plain vanilla," said Stan Greenstein, executive vice president of Mortgage Clearing House, a New York mortgage banking company.

Mainly because of people switching out of adjustable-rate mortgages, the Federal National Mortgage Association expects refinancing to account for as much as 25 percent of all new mortgages this year, the highest level since the refinancing boom of 1986.

Some local lenders report an increase in refinancings. Others say they've seen no increase yet but expect business to pick up.

Stephen Rotella, senior vice president of Chemical Banking Corp., said he believes business will pick up as consumers become more aware of the savings.

A refinancing surge would be welcomed by lenders, who have seen requests for mortgages fall off sharply with the decline in home sales. "Mortgages have just about dried up," said Raymond Smith, chief executive officer of Maspeth Federal Savings in New York City.

The eagerness of lenders would suggest they're willing to cut deals. Not so, said John Tsimbinos, president of Roosevelt Savings. "Most of the banks have been shrinking, so they have less money to loan out," he said.

Banking regulators have also clamped down on lending guidelines, forcing banks to be careful when making a loan.

But Miller said it won't hurt to negotiate. "What you should do is say, 'Look, the Yellow Pages are full of people who want to make a loan. Are you going to make the best deal or will someone else?' "

Because the borrower who is refinancing doesn't have deadline pressures, that person has more leverage in negotiations than the borrower who is buying a home and must find a lender willing to finance the purchase, often by a specific date called for in the sales contract.