Equity loans: More popular, but more confusing

Generally speaking, interest is tax-deductible on the first $100,000 of debt with both types of loans.

Rate difference
Rates on home equity loans tend to be higher. In Bankrate.com's June 9 national rate survey, the average rate on a home equity loan was 7.24 percent and the average rate on an equity line of credit was 4.77 percent. We're near the bottom of the rate cycle, so someone who closes today on a variable-rate equity line of credit will probably end up paying a higher rate than a neighbor who closes today on a fixed-rate home equity loan. "But you've got a long way to go, because it's still a big spread between home equity loans and home equity lines of credit," says Brian Regan, vice president and chief consumer officer for Lending Tree.

Lenders are looking for equity customers to replace their vanishing refinancing borrowers. In addition to dangling incentives such as airline miles, they are touting the low expense of applying for equity debt. A few years ago, homeowners had to pay closing costs -- usually between $150 and $800 -- for equity loans or lines of credit.

But now many equity lines of credit come with no fees, especially if the borrower makes an initial draw (akin to a credit card charge) when the account is opened. Sometimes you have to make an initial draw of thousands of dollars to get the fees waived. With equity loans, aggressive lenders either charge no fees or a few hundred dollars' worth.

"Most companies, such as us, give them away," says Hsieh of HomeLoanCenter. And with inducements such as air miles, "nothing gets a customer more excited than somehow dreaming of a free vacation to Hawaii," he adds.

As a further incentive, lenders are trying to make it as easy as possible to apply for equity debt and to close on it. Many lenders allow you to apply online or over the phone, and the approval decision takes 15 minutes or less. Most equity loans and lines of credit make do with an automated valuation instead of requiring a visit from an appraiser. Customers often have a choice of where to have the closing -- at home, at work, in a bank office, even at a coffee shop.

Banks are looking for ways to encourage customers to use their equity lines of credit instead of letting them sit idle for a rainy day. With its Home Asset Management Account, Wells Fargo increases a customer's credit limit as the home's value increases. With its fixed-rate option, Bank of America lets customers convert all or part of the balances on equity lines of credit into fixed-rate loans -- in essence, combining equity loans and equity lines of credit into one product.