With home values ballooning upwards in dozens of markets across the U.S., an already-popular real estate finance tool has begun to produce loan origination volume that is off the charts.

New home equity credit lines taken out at banks and mortgage companies soared by 77 percent during the first half of 2004, according to a new study by the Mortgage Bankers Association of America. Dollar volume of new credit line applications jumped by 106 percent -- more than doubling within a six-month period.

According to MBA researchers, the average credit line limit at application increased from $71,932 at the beginning of the year to $83,630 by July -- a 16.3 percent jump. The average initial drawdown on the line at settlement rose to $45,884 at mid-year versus $42,523 at the beginning of the year.

What's going on here? Are American homeowners turning into equity line junkies, hocking their houses to the hilt? Hardly, say mortgage market economists and financial analysts. With the average US home's market value up by 44 percent during the past 60 months alone, according to federal government data, homeowners recognize that they have comfortable equity cushions to tap if they choose to. Many owners in California, the mid-Atlantic, New England and Florida have seen their property values nearly double in short periods, and are fueling the credit line boom.

Home equity lines offer the potential to convert those otherwise illiquid appreciation gains into liquid, spendable cash, at low after-tax costs. Moreover, says Jay Brinkman, vice president for research and economics at the MBA, the new boom in equity credit lines follows on the heels of the refi boom of the past three years.

"People who had been doing cashout refi's as interest rates fell," says Brinkman, "are now finding that they can tap into their equity more cheaply without having to refinance their entire mortgage."

Some of the banks and mortgage companies surveyed by Brinkman's research team offer equity credit lines to homeowners at floating rates tied to the prime rate -- currently 4.75 percent. A few lenders go one step better and offer equity lines to customers with high FICO credit scores at rates of prime minus .25 of a percent or even minus .5 of a percentage point.

A handful of lenders have sought to make equity lines so pain-free and inexpensive that borrowers can hardly say no. For example, the Bank of America allows qualified homeowners to pull out as much as $500,000 in an equity line and pay no settlement costs, no appraisal fee, no title charges, no local taxes, no loan origination or document preparation, no annual maintenance fee, and no penalties for closing the line before a specific date or drawdown amount. The floating rate is the Wall Street prime.

With tax deductibility factored in, the effective cost of money for many borrowers on a line like this currently is in the low three percent range. Where else can you borrow hundreds of thousands of dollars at a price like that? Nowhere else but from your rich uncle or your grandmother who is rolling in dough -- if you're lucky enough to have such relatives, which most of us are not.

There is, of course, a potential downside risk to home equity line mania: Unlike fixed-rate home mortgages, credit line rates typically float monthly. If Federal Reserve chairman Alan Greenspan does what he says he plans to -- kick short-term rates up periodically to keep inflation in check -- the long-term outlook for today's bargain-basement home equity rates could be considerably more pricey.

Published: October 18, 2004

Use of this article without permission is a violation of federal copyright laws.

Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.