"Purchases seem to be steady, but the spikes we're seeing are definitely due to refinance," he said.

All Western Mortgage provided a lot of Federal Housing Administration financing at 6.5 percent, Biaggi said. Now FHA is offering "streamline" refinancing that doesn't require qualification or home appraisals. The only requirement is that payments were made on time.

"Everybody's jumping on that," Biaggi said. "People seem to be very aware of interest rates and what's going on and they're smart in reacting quickly. It's all about timing. You can miss that 5 percent by a day and end up at 51/2 (percent) and those are real dollars out of your pocket."

Nationally, average contract interest rates for 30-year, fixed-rate mortgages decreased to 5.04 percent from 5.18 percent, the lowest level since the record-low 4.99 percent the week of June 13, 2003.

"We've been waiting and hoping for rates to drop for some time," said Gibran Nicholas, chairman of the CMPS Institute, an Ann Arbor, Mich.-based organization that certifies mortgage bankers and brokers.

"We hadn't seen a big drop until recently and it's something that's long overdue and will help a lot of consumers. The only problem with low interest rates is not everyone is going to qualify. The good news is those that can qualify will enjoy lower interest costs. The bad news is not everybody is going to be in that position. You have people whose home values have dropped and they owe a lot more than it's worth. Those people won't qualify."

Mortgage applications have surged nationwide as interest rates approach near-record lows, the Mortgage Bankers Association reported in its weekly survey.

The Market Composite Index, a measure of mortgage loan application volume, jumped to 1,245.4 in the week ended Dec. 19, up 48 percent from the previous week. The Refinance Index increased 62.6 percent from the previous week to 6,758.6 and the seasonally adjusted Purchase Index increased 10.6 percent to 316.5, the Washington, D.C.-based group reported.

The refinance share of mortgage activity increased to 83.2 percent of total applications from 76.9 percent the previous week, the Mortgage Bankers Association reported. The adjustable-rate mortgage share of activity decreased to 0.8 percent from 1.1 percent.

Average contract interest rates for one-year ARMs decreased to 6.36 percent from 6.63 percent, with points decreasing to 0.28 from 0.30 for 80 percent loan-to-value ratios.

But another issue looms.

"I think the real issue these days is for all of us who have option-ARM mortgages that are beginning to come due, especially those of us who pay the monthly bills, but will get a very ugly shot in the arm when these become due," said Randa Bishop, who bought into the bankrupt Mira Villa condo project in Las Vegas. "And the problem is to get a fixed-rate loan, especially if the property has less value than when it was purchased.

"The banks supposedly are trying to assist some of the people who are late on payments or headed for foreclosure, but what will they do for shell-shocked buyers who keep paying on time?"

That will definitely be a problem for some people, senior mortgage planner Mark McGarry of First United Mortgage said.

He's going after FHA streamline refinancing, taking four new applications last week. There has never been a problem with FHA financing as long as the borrower's credit ratios are good, McGarry said.

"The problem is if you try to buy another home and put your first home up for rental, they make sure you've got 25 percent to 30 percent equity," he said. "That's the roadblock for the buy-and-bail that was going on this year, which is good. We don't need more foreclosures."

Because interest rates are so volatile, he recommends working with a mortgage professional to set a "target" rate. Nicholas said he'd heard reports of 4.75 percent with zero points one day last week.

When reviewing home loan applications, lending institutions look not only at the borrower's finances and the property's value, but also at the risk and volatility in the neighborhood. Those elements include property and neighborhood characteristics, as well as local market trends, flipping, fraud and default activity.

Contact reporter Hubble Smith at hsmith@reviewjournal.com or 702-383-0491.