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Many years ago homeowners could borrow 100 percent of the equity in their home. In today’s mortgage climate, banks limit the amount of money homeowners can borrow from their home equity. Many mortgage lenders now limit home equity loans to 80 or 90 percent of the total equity in the home. The total amount a bank will lend a borrower on home equity loans and home equity lines-of-credit depends on the borrower’s credit history and score. Banks also use a borrower’s credit history to determine interest rates.

Reasons Borrowers Use Home Equity Loans

Many homeowners use home equity loans and HELOCs to consolidate their debts or pay for any major expenses. Borrowers use the money to pay for their child’s education, remodel their homes, pay for a wedding or supplement their retirement incomes. However, home improvement and renovations are by far the number one reason why borrowers take out home equity loans. The good news is that many people use home equity loans to pay for what they need and not necessarily what they want.

Home Equity Loans- Sensible Borrowing Option?

Equity in a home represents a valuable asset. A home equity loan or line of credit usually offers low-interest rates and the ability to deduct that interest from a homeowner’s taxes. The ability to obtain a home equity loan also represents additional borrowing power in the event of an emergency. Home equity loans make the most sense when borrows can roll all of their high-interest debt into one loan with lower interest rates and one low monthly payment.

Finding the Best Home Equity Loans

Borrowers who want or need to tap into their home’s equity should follow a couple of tips that can help them save thousands of dollars in interest and fees. The first tip is to treat their credit scores with care. Borrowers must ensure their credit reports are accurate and reflect the correct information, such as collection accounts or judgments. Borrowers must shop around for home equity loans and inquire with multiple mortgage lenders. Local banks and credit unions usually offer the best deals on home equity loans.

The key to successfully obtaining a home equity loan is to make sure the financing makes sense. Too many homeowners take out home equity loans for all the wrong reasons. When they do, borrowers put their homes at risk by obtaining home equity loans they do not need, especially if there is an existing mortgage on their homes.

Sources:

http://www.bankrate.com/finance/home-equity/reasons-to-use-home-equity-2.aspx
http://www.bankrate.com/finance/home-equity/what-home-equity-debt-is-1.aspx