what is the physical difference between Cat-3 and Cat-5e wires? Why can cat-3 only support 16mbps while cat-5e can support 1gbps?

CAT 3 is classed as telephone wire and CAT 5 is obvious network. The difference is the twist. The more twists you have the faster it runs, so that is why CAT 5 runs at higher speeds is due to the twisting of the wires inside the cable.

And CAT5 can provide you 4 phone lines per cable run (only two wires needed for phone line, CAT5 has 4 pairs). I do this all the time.

cool thanks for the info

If I rewire all my phone lines with cat 5 will it be better?

If I rewire all my phone lines with cat 5 will it be better?

No, not noticeably. It's just copper wire, shielded. It's nothing special - if you've already got CAT3 in place, replacing with CAT5 won't get you any benefits other than a CAT5 run can bring 4 separate lines down in one cable run.