The portion of your home’s value that you own outright without any outstanding loan balance is known as equity.
If you’re a homeowner, you may have heard of the term ‘equity’ in relation to your property. But what is equity in a housing loan, and how can we make use of it?
Equity is the difference between your home’s current market value and the balance of your mortgage. It can increase over time, and you can use the equity in your home to your advantage in several ways. In this article, we take a closer look at what is equity in a housing loan and how you use it to your advantage.
Equity is the value of the home that you own. You can calculate the equity of your home by subtracting the outstanding loan balance from the property’s appraised value or market value.
For example, if a home is worth $400,000 and the borrower owes $100,000, the equity would be $300,000. In simple terms you can calculate equity as follows:
Equity = “value of the home” – “mortgage balance.”
Equity is an important factor in home equity loans and cash-out refinancing because it’s the portion of the property that the lender can use as collateral. The more equity a borrower has, the more collateral you will have, and you can use it to borrow money from your preferred lender.
Home equity loans and cash-out refinancing is popular because they offer borrowers a way to access the equity in their home without having to sell the property. You can use such loans for a variety of purposes, including home improvements and debt consolidation, among others.
You can increase the equity of your home over time. Here is how you build equity in your home:
Reducing the outstanding balance on your mortgage increases the value of your home. By making the monthly mortgage payments, you are increasing the equity in your home. You can build equity even faster by making accelerated payments.
Alternatively, you can make a large down payment when buying the home. This gives you more equity that you can tap into faster.
Making home improvements may increase the value of your home. Work with an approved contractor who will guide you on the best improvements to make and increase the value of your home.
Property often appreciate. This will help you build equity in your home. It’s important to note that the increase in value of a property depends on its location and the state.
A home equity loan, also known as a second mortgage, gives you cash from the equity you have built in your home. It’s a second mortgage with separate payment terms. Compared to other types of home equity loans, home loans usually have lower interest rates as they are secured by collateral.
Home equity loans are either a traditional mortgage or a home equity line of credit (HELOC).
Cash-out refinancing, on the other hand, allows you to pay off your old mortgage and take out a new one. When taking out a cash-out refinance, the borrower will seek to borrow more money at a lower interest rate than the first mortgage.
Part of the money borrowed goes to pay off the first mortgage, and the borrower can access the remaining balance. The lender will determine how much a borrower can get based on the loan-to-value ratio (LTV), income, and credit history.
Both home equity loans and cash-out refinancing allow the borrower to use the equity in their home to borrow cash. The borrower receives a lump sum in both cases. However, the two types of home loans have some differences.
Here is a summary of the differences between a home equity loan and cash-out refinancing.
|Home Equity Loans||Cash-Out Refinancing|
|The borrower gets cash from a lender on equity they built on their homes.||The borrower uses part of the equity in their home to access cash which pays for the old mortgage, and they receive the balance.|
|Does not require a high credit score.||Requires a high credit score|
|You will have two mortgages to service each with different terms.||You have one new mortgage with new terms to service.|
Both home equity and equity term loans allow you to tap into the equity of your home. But it’s important to understand the key difference before deciding which one is right for you.
An equity-term loan allows you to tap into the equity of a property that has pending payments. A home equity loan, on the other hand, lets you tap into the equity of a property with no pending payments.
In Singapore, you can take a home equity loan if you own a private property.
Those who own executive condominiums can take a home equity loan after completing the five-year minimum occupation period. Before taking out a home equity loan, there are a few things you should keep in mind.
Here are the most important factors to consider:
It’s risky to offer your home as collateral for a loan, especially if you are not sure you will be able to make the payments.
If you are unable to pay, you could lose your home. Before you take out the equity loan, make sure you will manage to pay it off to avoid losing your home.
Take the home equity loan only when it will help you improve your property or increase your cashflow.
If you are taking a home loan to be able to pay off and consolidate debts, it may be viable as that enables you to have one loan.
However, before you opt for a home equity loan, look out for other loan types that may make much more sense for the purpose you want to achieve.
For example, consider taking a personal loan for an occasion such as a wedding.
Consider the value of the property before deciding to go for a home equity loan. Consult with an appraiser and research the current value of similar properties in your location to see whether your property has substantial equity to get you the cash you require.
If you own a private property or executive condominium, chances are you have built up some equity in it. Follow the below steps to apply for a home equity loan.
The first step should be to do your research on the lender offering the best interest rates and tenure. Get quotes from several lenders and choose the one with the best terms.
When checking the terms of the home equity loan, make sure you compare the interest rate, and the cost you will incur.
The lender will require you to submit the following documents:
In conclusion, equity in a housing loan is the portion of your home’s value that you can use as collateral for a loan.
You can make use of the equity in your home by taking out a home equity loan or line of credit or by refinancing your mortgage. When used wisely, equity can be a valuable tool to help you reach your financial goals.
We hope you now understand what is equity in a housing loan and how you can make use of it.
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No, you can’t use your CPF funds to pay for the home equity loan installments. You must pay in cash.
No, you can’t cash out from your HDB property. You can take the loan if you own private property or an executive condominium and complete the minimum occupation period of five years.
When taking out a home equity loan, the mortgage rules apply. You have to get to a 75% LTV, assuming your property has no pending mortgage on it and your credit history is good.
You can’t cash out the portion of your property that you paid using your CPF OA funds.
The main drawback of an equity home loan is that you are using your property as collateral. There is a risk that you could lose the property if you don’t manage to pay back the loan.