Aside from being a shelter for you and your family, your home can also be your ticket to solving your financial crisis. A home’s value actually increases each time you renovate it or add new features to it. As a result, it makes a good source for cash if you find yourself in a financial bind.
But, how can it be done?
A good way to do this is by taking out a personal loan known as a home equity loan or cash-out refinancing program. Moneylenders and banks offer this to private property owners and enable them to borrow money with low-interest rates from 1% to 2% using their home’s equity.
HDB owners cannot avail this program.
Home Equity Loans in Depth
Banks tend to allow borrowers to borrow up to 80% of their home’s current market value if they take out a home equity loan. If you currently have a pending mortgage, the amount you can borrow will just be up to 60% of your home’s current market value.
The amount that would also be allowed would also be determined by your current mortgage and other CPFs you used to secure the property.
As far as loan tenure is concerned, it is usually computed based on the borrower’s age and the length of time you used to service the property loan for the house. For example, if you have spent 5 years paying off your property loan and you are currently 45 years old, your loan term can be as long as 25 years.
You will also have to pay a fee from $2,000 to $3,000 to get the loan processed and your house valued by the lenders. You will also have to wait for two months before everything is finalized.
Another note to consider is the fact that you should have paid for your property loan in cash.
When Should You Cash Out?
When you find yourself in need of funds, you will need to determine if it is right for you to get a personal loan or if it is right that you use your home as a collateral and take out a cash out. If things get dicey, it will be difficult to get back your house and your money back. The bank or the moneylender can easily foreclose your property if you failed to pay your repayments.
But, if you really need a large sum to help you with your financial trouble, here are the signs you should consider cash outs:
- If you will be using it for business without taking out a business loan, it is best to cash out because business loans come with 10% interest rates and more.
- If there is a medical emergency, you can use a cash out to help pay your bills.
- If you have quite a lot of debt with high-interest rate, you can use a cash out to consolidate all your bills and it comes with a very small interest rate.
What to Remember Before Cashing Out?
If you are set in taking in a cash-out refinancing, here are the things you need to remember before you sign your contract for it:
- Cash-out refinancing is another form of debt
Cash-out refinancing or home equity loans are loans, meaning you are taking in more debt rather than reducing it. If you do take out this loan, you must borrow the amount you will use and be capable of repaying your loans monthly and on time.
- Always take note of all the margin calls you to get
If your moneylender or the bank calls you to top up your home loan if your property’s value drops down, you need to answer it and do as the bank or lender asks so your loans will not have problems. Check the housing market regularly and get updates about it with your lender.
- Repossession can occur
If you somehow default your home equity loan, the moneylender or bank can sell your property to recover the money you borrowed. If you will have a problem with your repayments, it is important you call your lenders at once so a compromise can be met.
- Get the cash out for important things
Some people tend to make a mistake as to when they should take out a personal loan. Do not use cash-out refinancing if you will just use it for things like getting a car, paying for an event or getting luxury products. While it is ok to use it for these things, the fact still remains you are putting your house at risk if you can’t pay the monthly.
- Your home loan repayment will not be finished for a while
Until your cash out refinancing bill is finished, you will not be able to fully pay your home loan since you are technically going to be repaid for it.
- Do your research before getting one
Moneylenders and banks vary in terms of the rates they have for home equity loans. In this extent, ask the help of a wealth manager to check if cash out refinancing works well for you since they can determine the right financial program for your needs. If it is not possible, getting a mortgage broker can help you pick which bank or lender to approach for cash-out refinancing or how to get the best valuation for your home. You may even get a discount on getting the loan with their help.
Home equity loans or cash-out refinancing is perfect if you need to get a large amount of money to pay off critical expenses without having to worry about the extra cost. However, since you are putting your home – an investment you have worked hard for – as a collateral, it is best you consider the loan carefully before agreeing to it. Should your house’s value drop significantly, you may end up having to pay more for your loans and lose the home you love.