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LAST DECEMBER, JUST 12 MONTHS AFTER BUYING their three-bedroom Tempe, Ariz. home with a 90% mortgage, Brenda and Oscar Hardin Jr. refinanced. They trimmed the interest rate they were paying on their 30-year, $300,000 fixed-rate loan by one percentage point, to 8.25%, cutting their payments by almost $200 a month. What's more, their lender, Countrywide Home Loans, charged the Hardins no points or fees of any kind. Result: Brenda, a 41-year-old schoolteacher, and Oscar, a 46-year-old psychologist, can devote more money to a planned cross-country vacation in July. "If rates keep falling, we'd do it again tomorrow," says Brenda.

The Hardins are part of a growing army. Refinancings now account for half of all new mortgages, vs. just 10% a year ago. The reasons are obvious. Since last August, the average rate on a 30-year fixed-rate loan has tumbled from 8.2% to 7.3%. Thanks in part to the Federal Reserve's quarter-point cut of short-term rates in January, 30-year fixeds could skid to 7% by midyear--mighty close to the 28-year low of 6.6% in October 1993--unless congressional radicals push the U.S. Government into defaulting on the national debt, which seems unlikely. But if that happens, rates could spike up a quarter to half a point, says David Lereah, chief economist at the Mortgage Bankers Association. To be safe, then, it pays to act now.

Furthermore, lenders are increasingly willing to waive closing costs and points to attract customers. There's a trade-off, though. In general, the lower a mortgage loan's up-front costs, the higher its interest rate, and vice versa. For example, rates on a 30-year fixed-rate mortgage run as low as 7% if you pay closing costs (which can total $1,000 or more) and two points (each point equals 1% of the mortgage's value). Such a high-cost, low-rate mortgage is your cheapest option if you plan to stay in your home for three to five years and can cut your rate by at least a percentage point.

By contrast, rates on a no-point and no-closing-cost fixed-rate loan, like the one the Hardins got, hit about 8.25%--but the loan's no-cost status means that even a small rate differential of 0.25% or so will pay off immediately. So even many people who have already refinanced or who bought just a year ago can save by refinancing now.

Two types of homeowners have the most to gain from refinancing this year, says Mark Zandi, chief economist at Regional Financial Associates, a West Chester, Pa.-based economic forecasting firm: those with adjustable-rate mortgages (ARMs) and those with fixed-rate mortgages at 8% or higher. To decide if refinancing makes sense for you and if you should opt to pay up-front costs to get a lower rate, you'll need to calculate your break-even point, or the length of time it will take to recoup any expenses. Here's how:

Add up the costs, if any, of refinancing. Those expenses typically include one to two points, plus closing costs to cover processing your application, a credit check, an appraisal, title insurance, taxes and other items.

Ask lenders to quote you the proposed new monthly payment. Or figure it by using Money Online's mortgage calculator (see above).

Compare the amount you'll save in payments to your refinancing costs. If you'll recoup those outlays in less than three or four years and plan to stay put for another year beyond that, it pays to refinance, advises Keith Gumbinger, vice president at mortgage tracker HSH Associates. For example, the monthly payment on a $150,000, 30-year loan would be $998 at a 7% rate, vs. $1,153 at an old 8.5%. Even if you pay a whopping $4,000--two points plus closing costs--you'd come out ahead in 26 months.

If refinancing makes sense for you, relax: The process isn't difficult. It requires the same kind of paperwork you assembled for your first mortgage. And you'll typically get the new loan in just 30 days or less. Here's how to refinance right:

Shop aggressively. Check out at least four to six lenders, not just the one that holds your existing mortgage. Big national mortgage bankers like Countrywide Home Loans, GMAC and Norwest often offer the best deals on fixed-rate mortgages. Mid-size banks and thrifts generally have the best deals on ARMs. One advantage to sticking with your current lender: It may agree to waive a new appraisal or title insurance. That can save you a few hundred bucks.

Pick a fixed-rate mortgage. The premium you pay for the stability of a fixed-rate is small now--about 1 1/2 points--so refinance to an ARM only if you plan to move in less than three years. Fixed-rate mortgages also are more attractive than fixed-rates that convert to ARMs in three to 10 years. Rates are not low enough on those so-called hybrid mortgages to risk a steep rate hike later.

Get the shortest-term loan you can afford. Generally, the shorter a loan, the lower the rate but the higher the monthly payment. When rates fall, instead of cutting your expenses by refinancing to a lower-rate 30-year loan, see whether you can afford a 15-year loan for a monthly payment similar to your current one. For example, you can now find a 15-year fixed loan at 6.5%, which translates into a monthly payment of $1,307 on a $150,000 mortgage. That's just $46 more than you'd pay per month on an existing 30-year 9.5% mortgage. Over the life of that 15-year loan, you'd pay a whopping $219,000 less in interest--and look forward to 15 fewer years of writing mortgage checks.