Low rate home equity line

If you're ready to spring for a new kitchen or redo the master bath, home-equity lenders want to hear from you. "What beats borrowing at 5.5 percent/8.5 percent? Deducting it," states one newspaper ad. Another: "Our 60-minute home-equity credit line leaves all the others in the dust." And there's the direct approach: "What's up? Not our rate."

That's a far different song than lenders were singing a year ago, when they were too busy processing refinancing paperwork to pay much attention to home-equity loans. Now that rising interest rates have slowed the refinancing traffic, lenders are shifting their focus.

Since last October, mortgage rates have jumped more than 1 1/2 percentage points and the prime by 1 1/4 points--but many lenders have lowered rates on their home-equity loans and lines of credit. (A home-equity line of credit sets up a special account with a fixed total to draw upon whenever funds are needed; each withdrawal represents one loan, typically repayable over 10 or 15 years.) Variable-rate home-equity lines are available in many cities at 4.9 percent, down from around 7.5 percent last fall. Other banks, like Citibank in Washington, D.C., and Chase Manhattan in New York, are offering loans and lines of credit at introductory rates a point or more below prime, no points and no closing fees.

Fast approvals. In similar deal-sweetening fashion, other lenders are waiving processing fees, taking applications over the phone and approving loans within an hour. Perks include free checking accounts and home security alarms. Chase even pays some borrowers $100 at closing.

An enthusiastic reaction to this outpouring of lender largess isn't unexpected. Home-equity loans and lines of credit are the last bastion of consumer borrowing, other than mortgages, on which the interest is tax deductible. The limit on the tax-deductible amount borrowed is $1 million when used for remodeling, less the outstanding amount of the current mortgage, or $100,000 if the proceeds are used for other purposes, such as a car or a vacation.

Tax deductibility alone isn't a good enough reason to borrow against a home, however. Most of the new loans and lines of credit carry a variable interest rate and a low teaser rate that ratchets up after three to 12 months. The ceiling can be as high as 25 percent over the life of a loan, usually 15 years. Two weeks ago, for instance, a Citibank ad offered an introductory rate of 5.5 percent, stressing its equivalent after-tax rate of 3.96 percent for a borrower in the 28 percent tax bracket. After nine months, the rate then fluctuates monthly, based on the prime rate plus 1 point--currently 8.25 percent. Most lenders base their variable rate on the prime rate plus 1 to 3 points.

Most lenders are offering fixed-rate home-equity loans, but they can hardly be viewed as bargains. The interest rate on a typical 15-year loan is around 9 percent, or about 3/4 of a point above a typical 15-year first mortgage. Some local markets do offer better deals on shorter-term loans. First Virginia in Richmond, for example, is now offering a 7.24 percent fixed-rate loan with a five-year term.

Most home-equity loans are limited to 75 percent of the current value of the borrower's home minus the balance on other mortgages. That can squelch the ambitions of owners whose homes haven't appreciated significantly or who haven't owned them long enough to pay down the first mortgage. A house purchased a few years ago for $150,000 with 20 percent down and that is now worth $160,000, for example, wouldn't qualify for any loan; 75 percent of its current value, less the outstanding first mortgage, would leave nothing on which to borrow.

HomeStyle, introduced last year by the Federal National Mortgage Association, the nation's largest supplier of home mortgage funds, is more generous. Fannie Mae lets you borrow up to 90 percent of the post-remodeling value of your home minus the outstanding first mortgage. The loan ceiling is $101,575. "Now, even folks with hardly any equity in their homes can find loans with no cash out of pocket," says Keith Gumbinger, an analyst with HSH Associates, a Butler, N.J., mortgage data firm.

But they'll pay dearly. Typical rates on HomeStyle loans topped 9 percent recently; some lenders are charging 11 percent. HomeStyle is offered in 16 states through lenders available by calling (800) 732-6643. At those rates, however, you'll want to spend plenty of time in that new kitchen.