home equity loans becoming more prevalent

With the Federal Reserve raising interest rates six times since last summer, the mortgage business has been fading fast. These days, banks see home equity lending as a fertile market for new customers or for building business with existing clients.

In 2004, home equity loan originations increased 35 percent to $431 billion, according to smrresearch.com

With a home equity loan, homeowners borrow against the difference between their home's appraised value and the total amount they owe on the home. There are two types of home equity loans: fixed-rate loans and lines of credit. With a fixed-rate loan, homeowners get a one-time sum that is to be paid off during a set period at a fixed interest rate. On the other hand, a home equity line of credit works similar to a credit card. The borrower has a set borrowing limit, and he takes our money as he needs it. The line of credit is an adjustable rate loan, and typically start our with a lower rate then the fixed rate home equity loan. Both can offer a tax deduction on money borrowed up to $100,000.

Common uses for these home equity loans are: debt consolidation, home improvements, medical expenses, education, emergencies and big ticket item purchases. Consolidating debts in a home equity loan is appealing to many homeowners because the interest rates are much better than those of credit cards. As of last week, the average rate nationally on a $50,000 fixed-rate home equity loan was 6.98 %, with a line of credit at 5.71 %.

With demand for home equity loans on the rise, lenders are offering a host of incentives and new products to lure customers. For example, Wells Fargo has a "SmartFit Home Equity Account" which is a home equity line of credit loan that lets the borrower fix the rate for three, five or seven years, before it converts to an adjustable rate loan for the remainder of it's 15 or 30 year term.