Lenders' phones are ringing off their hooks these days. Following a two-year period of comparatively high rates, mortgage rates have fallen to approximately 7 percent for a 30-year, fixed-rate loan. In response, a record number of homeowners have decided it's time to refinance. The lure of lower payments -- and extra diposable cash -- is burning a hole in homeowners' pockets, so to speak.

U.S. News & World Report recently provided some perspective on the subject, reporting that less than a year ago, in spring 1997, homeowners were agreeing to rates higher than 8 percent, and 8.25 percent mortgages, a relic of 1995, are still very much in existence.

Refinancing used to be considered futile unless you could manage to reduce your interest rate by at least two percentage points. That notion held weight when double-digit rates were the norm. Today's homeowners with mortgage rates either at or below 1995 rates can still reap the benefits of refinancing, however. U.S. News Online, in conjunction with mortgage rate watchdog firm HSH Associates, has created an interactive calculator to help homebuyers decide if refinancing is the right decision for them. Illustrations like the following one provided by U.S. News Online suggest that for some homeowners, there's little guesswork involved in making the decision whether or not to refinance: A homeowner who borrowed $175,000 at 8.25 percent in 1995 could refinance now and cut monthly payments by 13.3 percent, from about $1,315 to $1,140, a savings of $175 per month. According to Keith Gumbinger, a vice president at HSH Associates, up-front refinancing costs for the above-described homeowner would total approximately $4,000 (including about $2,000 in "points" paid to the lender and an additional $2,000 in closing costs). While some lenders crow about "no-cost" refinancing with no up-front charges, don't be fooled. Your interest rate will be higher to offset that sweet deal.

If you can swing it, however, there's something to be said for continuing to pay that $1,315 per month -- but with a new, shorter-term mortgage. This strategy enables the homebuyer to accumulate more equity than he would if he cut his monthly payments. Another option is to pay up front the extra amount of money every month, although it's important to ensure that your lender doesn't impose penalties for doing so. Lenders are becoming more lenient these days with respect to prepayment penalites; after all, the potential for losing a flood of customers to your competition is a strong motivator, and can influence any lender to ease up on long-held penalties. Still other homeowners may choose not to prepay, but rather to invest their extra disposable income in stocks.

Jeff Eischeid, director of personal planning for KPMG Peat Marwick's regional office in Atlanta, passes along some sage advice for homeowners before their savings burn any holes in their pockets. Before making any decisions, homeowners should ensure that they have adequate medical, disability, and life insurance for their families; set aside enough savings to cover at least three months' living expenses; fund employee retirement plans at least enough to get their employers' matching contributions; and pay off credit-card balances and other high-interest consumer debt.

For a list of helpful and related links, go to U.S. News Online