If you have been struggling to look at ways of paying for your child’s college education, you may have been considering getting a loan. And tapping into your home’s equity must be one of your options.
A home equity loan, also called the second home loan, is a type of consumer debt permitting homeowners to borrow against the property value of their property. Its amounts are based on the difference between a home’s current market value and the mortgage balance due.
You repay the loan with equal monthly payments over a fixed term, just like your original debt. If you fail to repay the loan as agreed, your lender can immediately foreclose on your home.
While HDB owners are not eligible for a home equity loan, borrowers need to be owners of private property, as well as HDB Executive Condominiums after fulfilling the Minimum Occupation Period of five years in Singapore. On the other hand, for homeowners who still have outstanding loans mortgage, they can get their home equity loans from the same bank.
It’s revealed that if your property has increased value over time, the home equity loan can be the most ideal way to borrow money at a low-interest. However, once the real estate values decline, you could end up owing more than your home is worth.
The basics of home equity
Listed below are the most common ways to access the equity loan on home:
1. Home equity loan or term loan
An equity loan home or term loan, as we have stated earlier, is a loan for a fixed loan amount of money that is secured by your home. The loan amount is based on a number of factors including the combined loan-to-value ratio or CLTV which is commonly 80% to 90% of the estimated value of the property, as well as your credit score and payment history. This approach is considered a good source of money for major projects and one-time expenses
- Pro: Easy to obtain- which can also be considered as a con.
- Pro: A fixed rate.
- Pro: Monthly payments won’t change and are for a certain set period.
- Con: Tapping all the equity in your home in one fell swoop can work against you if property values in your area sink.
- This approach is best for people who know how much they need for a given project. It can also be offered for people who want to use the funds for home improvements, given that the interest you will pay is tax-deductible if the money is used for renovations.
2. Home Equity Line of Credit
Much of a credit card, HELOC or Home Equity Line of Credit is a revolving line of credit. You can borrow as much as you need, any time you need it, by writing a check or using a credit card connected to the account.
While HELOC is a line of credit, you make payments only on the amount you actually borrow, not the full amount available. HELOC terms have two parts, draw period and repayment period.
The draw period, during which you can withdraw funds, might last 10 years, and the repayment period might last another 20 years, making the HELOC a 30-year loan. Should the draw period ends, you can no longer borrow your money.
- Pro: Pay interest is compounded only on the cost you draw, not the total equity available in your credit line.
- Pro: May offer the flexibility of interest-only payments through the draw period.
- Con: Rising interest rates can easily increase your payment.
- Con: Without discipline, it’s likely for you to overspend, tapping out the equity in your home.
- This approach is best for financial needs spread over time, or if you want flexible access to your equity that you can pay off quickly.
3. Cash-out refinancing
Cash-out refinancing is a home loan option in which an old debt is replaced for a new one with a larger amount than owed on the previously existing loan, helping borrowers use their home mortgage to get money.
You would normally pay a higher interest rate or more points on a cash-out refinance mortgage, unlike with a rate-and-term refinance, in which a mortgage amount remains still.
- Pro: Lower rate with other beneficial modifications such as tax deductions.
- Pro: Borrowers get cash paid out to them that can be used to pay down other high rate debt or possibly fund a large purchase.
- Con: While your home is the collateral for any kind of mortgage, you risk losing it if you can’t make the payments.
- Con: You’ll pay closing costs for a cash-out refinance, as you would with any refinance.
- Con: If you borrow more than 80% of your home’s value, you’ll have to pay for private mortgage insurance.
- This approach is best for college fees, property improvements as well as to consolidate debt.
Different ways to use a home equity loan
Considering this approach can fit for any purpose but here are the ideals on when to use home loan with equity:
1. Debt consolidation
You might have existing loan commitments and these probably all have higher interest rates than your actual mortgage. It can be appealing to consolidate multiple debts into a single monthly payment, especially when your interest rate will be lower. However, you’re stretching out the time to repay them over 15 to 30 years. You could end up paying much more interest and have the dangerous opportunity to keep using your credit cards to overspend.
2. Home improvements
With a lower interest rate, more tax benefits, and a select a payback period to fit your budget, remodeling can instantly increase your home value. Note that making home improvements doesn’t necessarily mean just adding a new room or a bathroom, but a real makeover.
3. College costs
Whether it’s for your own education or your child’s, paying for it with a low-interest mortgage over 15 to nearly 30 years can seem more appealing than taking out higher-rate student loans with a 10-year repayment duration.
4. Emergency funds
When all things fail, home equity loans can also be considered for emergency funds. HELOC would be a great option as it allows you to invest your current emergency savings for the future, rather than leaving it sitting in a savings account.
How much to borrow from my home equity?
Lenders are willing to lend at CLTV ratios of 80% and above to borrowers with high credit ratings. CLTV or the combined loan-to-value (CLTV) ratio is the ratio of all secured loans on a property to the value of a property. It is used to determine a prospective home buyer’s risk of default when more than one loan is used.
Depending on your creditworthiness and the amount of your outstanding debt, you can borrow up to 85 percent of the appraised value of your home less the amount you owe on your first mortgage. You can ask the lender if there is a minimum withdrawal requirement when you open your account, and whether there are minimum or maximum withdrawal requirements after your account is opened. Check how you can spend money from the credit line.
Use this formula to calculate your rates. With the combined loan-to-value ratio, divide the aggregate principal balances of all loans by the property’s purchase price or fair market value.
CLTV= Total Value of the Property/VL1 + VL2 + … + VLn
vl* value of loan
For example: Xavier owes $60,000 on a primary mortgage and wants to take out a HELOC for almost $15,000. The house is worth $100,000. The CLTV is 75%: ($60,000 + $15,000) / $100,000 = 0.75
How they compare
|Loanable Amount||The amount that you can borrow usually is limited to 85 percent of the equity in your home.||The lender will allow you to borrow 85% or .85 in equity.||A cash-out refinance can possibly go as high as approximately 125% of the loan to value.|
|Repayment||A home equity loan term can range anywhere from 5-30 years.||HELOCs generally allow up to 10 years to withdraw funds, and up to 20 years to repay.||A cash-out refinance term can be up to 30 years.|
|Interest Rate||Average: 3.50%–9.25%||Average: 1.79%–7.99%||Average: 3.250 %|
|Points||A score of at least 680 is typically required to qualify for a home equity loan.|
Things to consider
While you’re almost set to decide whichever option fits you. We’d like to remind you that as time passes, the value of your home can still decline.
There will eventually be many factors on how this will occur and it’s best to take note of that. There will also, as always, be a limit to how much you can borrow which depends on your spending. Always remember, you may opt for unsecured personal loans to avoid the risk of using your home as collateral.
For more of your financial loan comparison needs in Singapore, Loan Advisor will help you make a choice. As one of the most trusted sites out in the market, we guarantee that you can get the best deal swiftly.