A rise in interest rates could put a chill in the suddenly hot home equity market, depriving banks of what has become a major source of revenue.

Over the past several weeks, demand for home equity loans has heated up just as the mortgage refinancing market has been cooling off. The switch from refinancing to home equity loans is a big reason many of the nation's banks say they continue to see strong consumer borrowing demand.

In the first week of April, the dollar value of home equity loans issued by the nation's commercial banks was $315.4 billion, up 2.5% from the week before, according to the Federal Reserve. For all of this year, home equity loan balances at the nation's biggest banks have risen 12%.

By comparison, mortgage-refinancing applications fell 30% during the first week of April, following a big surge in the interest rate on the 30-year fixed-rate mortgage to 5.89%, according to the Mortgage Bankers Association.

But some expect a similar cooling off in the home equity market if the Federal Reserve starts boosting interest rates this summer -- something that looks increasingly likely following Fed Chairman Alan Greenspan's upbeat comments on the state of the economy.

The worrywarts say home equity loans are much more susceptible to changes in interest rates than other kinds of consumer debt. That's because the interest rates banks charge borrowers on home equity loans are often tied to changes in the prime lending rate, and that rate tends to move in lockstep with fed funds.

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