Some would say that homes are a dead investment. It’s a property that does not earn and is losing value the longer we live in it. But, the idea of home equity loans proves otherwise.
Home Equity loans best for making home improvements or consolidating debts with a lower interest rate. But, a home equity loan is a wrong decision if it will overburden your finances and if will only shift your debt around. You have to be extra careful in deciding if this is the type of loan for you.
In this article, learn how to make the most of your home equity loans. You will also know the difference and similarities between the three different types of home equity loans. Also, read about the techniques you can use so you can get the highest loan amount and the lowest interest rate.
Basics of Home Equity
To make the best out of the equity of their home, borrowers usually have three options. These are home equity loan or term loan, HELOC, and Cash-out refinancing. Here are the pros and cons of these home equity loans
1. Home equity loan
It is a secured loan secured by the equity of the borrower’s home. Here, the loan is paid in one lump sum. This means that the borrower can use the cash for a big expense or purchase. One disadvantage of this usually has the highest interest rates among the three types of home equity loans.
Home Equity Line of Credit (HELOC) is the same with home equity loan as it is a secured loan where the borrower’s home is used as collateral. The difference is that it is like owning a credit card – you can borrow money when you need it. With this setup, HELOC is best for small emergency expenses like home renovations, medical bills, college tuition, etc. The downside of those loans is that you can use it for major purchases. You need a different type of loan if you wish to get a big lump sum of the loan amount.
3. Cash-out Refinancing
In this type of loan, you can use your home as a collateral to a loan even if you have not paid it yet. This means that even if you do not own the house yet, you are making the most out of it. Among the three options, this one has the lowest interest rate. The downside of this loan is that it has high administrative fees. The legal fees for processing your loan application alone can cost you around $3,000.
Ways to Use Home Equity Loans
As mentioned earlier, home equity loans are meant for specific purposes. Borrowers have to be extra careful because using these loans in bad circumstances could make their finances suffer gravely. Here are four of the main ways to use these loans.
1. Debt Consolidation
If you have debts with high-interest rates like a credit card debt, take a home equity loan to pay it off. By doing so, you are saving money because you will have to pay a lower interest. To do this properly, you must know the interest rate of each of your loan so you can compare which of them has the biggest rate. From there, you can decide if debt consolidation could help you.
2. Home Improvement
You can apply to any of the home equity loans and use the money to improve your home. By doing so, you are increasing the property value of your house. Once the value of your house increased, you can get a higher selling price, or you can get a higher loan amount. Make sure that doing home renovations to increase your property value will benefit you financially and not just boost your pride.
3. College Cost
A student loan can have high-interest rates. To save money, you can apply for a home equity loan instead of paying off your student debt in years. This is a good investment because, in the long run, you are saving a lot of money.
4. Emergency Expenses
At times of unforeseen events like medical emergencies or unplanned home renovations, you can take a home equity loan. Still, the best thing to do is to build an emergency fund enough to help you survive several months without earning money. But for those who do not have the cash to spare, taking a home equity loan may be the best choice.
How Much to Borrow From my Home Equity?
To compute the loan amount you can get from a home equity loan, there are three main factors to consider which are below. The formula is A minus B minus C equals to the total amount you can borrow. After computing this, some banks could charge you with a disbursement fee.
a.) 70% to 90% of the home’s current market value
b.) Outstanding home loan amount (if there’s any)
c.) Total CPF funds used to purchase the property
Take this, for example. Let’s assume that home value is at $1 million and your bank decide to consider 80% of it, your outstanding home loan amount is $200,000, and you uses $200,000 CPF funds. This would translate to: $800,000 – $200,000 – $200,000 = $400,000. This would mean that you can borrow around $400,000.
How They Compare
Each of the home equity loan types has its own factor to consider. In the comparison table below, you can see these factors you have to consider when taking these loans. These are a.) qualification – what type of property you can apply for; b.) loanable amount – the computation on the possible total cash you can get from the loan; c.) repayment – the length of time you need to pay the loan; d.) interest rate – the range of interest banks usually offer; and e.) points – credit score points you need to apply for one of these home equity loans. Examine which of these factors are important for you so that you can identify the best home equity loan.
|Home Equity Loan||HELOC||Cash-out refinance|
|Qualification||Must be a private property home||Must be a private property home||Must be a private property home|
|Loanable amount||70%-80% of property’s current market value minus outstanding home loan minus CPF used||The remaining amount of the mortgage plus the amount you would like to be extended divided by the appraised value of the property||70%-80% of property’s current market value minus outstanding home loan minus CPF used|
|Repayment||5 to 30 years||10 years or more||15 to 30 years|
|Interest rate||3.5% to 10%||2% to 8%||1.3% to 1.6%|
Things to Consider
If you believe that taking a home equity loan is the best for your situation, it is important to take these things into consideration before applying for a loan.
First, the value of your home can decline through the years. Aside from damages, you can inflict to your own home, new houses are just priced higher. If you want to take a high equity loan, you must do so before the price of your property depreciates.
Second, there is a limit to how much you can borrow if you take a home equity loan. As mentioned above, there are various factors that can affect the total cash you can borrow, including your creditworthiness, the price of your home, the remaining mortgage you have, and many other more. To get an idea of how much you can take from a home equity loan, you can try to do your own calculations or consult a bank representative.
Third, the three types of home loans mentioned above all consider your home as your collateral. This means that you can lose your home if you fail to repay the cash you owe. With this, it might be best for you to look for an unsecured personal loan rather than taking an equity loan on home. Remember that there many other loan options to choose from aside from home loans.
If you are in need of cash, you can always choose to take a home equity loan. Compared to other loans, this secured credit has relatively low interest, long repayment plans, and usually has a fixed rate. But there are also things to consider before taking this credit. When done because of wrong reasons, you can lose your home, and you can be in more financial troubles.
Before taking the big decision to apply for a home equity loan, you must first consider other loan options you have. If you are badly in need of quick cash, there are licensed moneylenders who could help with your situation with alternative financing, such as personal loan. The processing of your application is fast, and you are not burdened with submitting a lot of requirements.