JANE BRYANT QUINN

Here's a question I put to a number of consumer-loan specialists last week: Is there ever a good reason for taking a home-equity loan worth more than your home?

Their various answers can be summed up in two words: "almost never." Still, there are some situations where the loan might be the better of two bad alternatives.

In the good old days (three years ago), lenders rarely permitted home-equity loans to exceed 80 percent or 85 percent of the value of your home, when combined with your first mortgage or deed of trust. A very few banks did 100 percent loans.

But finance companies (including those owned by banks) have gotten much more aggressive. They're peppering the country with ads for 125 percent home-equity loans, for people with good credit histories. Some lend up to 150 percent.

These are good-times loans, says Keith Gumbinger of HSH Associates in Butler, N.J., which tracks mortgage interest rates. The lenders assume that you won't lose your job.

Strictly speaking, you're not getting a true home-equity loan. The portion of the loan that exceeds the value of your house amounts to unsecured consumer credit.

The interest rate on a true home-equity loan is currently in the 8.5 percent range at big banks, says Robert Heady, publisher of the Bank Rate Monitor in North Palm Beach, Fla., which surveys bank interest rates.

The rate on loans larger than the value of your home is running at 13 percent to 14 percent, Heady told my associate, Kate O'Brien Ahlers.

Interest is generally tax deductible on home-equity loans of $100,000 or less. So borrowers assume that their full interest cost can be written off.

But not in this case. You can't deduct interest on the portion of your loan that exceeds your home's fair market value.

As an example, say you have a $200,000 home, with a $170,000 first mortgage and a $50,000 home-equity loan. You first deduct the interest on your original mortgage or deed of trust. Then you deduct the interest on $30,000 of your home-equity loan.

The rest of the interest is generally non-deductible unless the loan is used for a deductible purpose for example, to start a business.

There's a gray area here. Exactly what is your home's fair market value? You can take a stab at a reasonable valuation or get the opinion of a real estate agent. Whatever you decide will have to be defensible in an audit.

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