If you've been shopping around for a home loan, you may have come across loan packages that apparently allow you to free up cash by "unlocking your home equity". For the experienced investors, this is a concept that needs little introduction. But for those who have little exposure to home loans and banking products in general, this may not make a whole lot of sense to you.
In this article, we'll attempt to explain what home equity is, and how you would be able to take advantage of it to free up funds riding on the inherent value of your property.
First Off, What is Home Equity?
In the simplest terms, home equity refers to the difference between the existing value of a property against the amount you still owe in your home loan for the said property.
If your home is currently valued at RM500,000
And you still owe RM400,000 in home loan
Your home equity = RM500,000 - RM400,000 = RM100,000
What does "Unlocking Home Equity" Mean?
When a bank offers you the facility to free up funds by "unlocking" your home equity, it simply means that you're able to gain access to (i.e. borrow) a sum of money that is equivalent or up to the value of the home equity of your property. In the above example, that amount would be RM100,000.
How do you go about "Unlocking Home Equity"?
These are the two common ways:
1) First, you may apply for a home equity loan or line of credit using your property as collateral, which gives you access to fund that could be equivalent or less than the value of your home equity. Take note you will most probably incur charges for setting up and maintaining the loan / credit line.
2) Secondly, you could opt to refinance your home loan. By maximizing the Margin of Financing for your refinancing deal (i.e. over-borrowing), you could use part of the money to pay off your old loan and the excess as cash for your personal / investment use. The major charges to refinance include the legal fees as well as pre-paying penalties for your prevailing loan package (if they apply).
The Benefits of using Home Equity
There are many reasons why people would choose to use home equity to free up cash. These are some of the key ones:
- Lower Interest: the interest of borrowing money using home equity is usually lower than that of other common credit vehicles (such as a credit card).
- Easier Loan: gaining access to large amount of funds is generally much easier when you leverage on your home equity, because banks are more ready to lend money to you with your home as collateral.
- Less Hassle: by setting up a home equity line of credit, you can rest knowing you can gain access to a pre-approved amount of money any time. This is much more convenient than, say, going to apply for a brand new personal loan in times of emergency.
A Word of Caution on "Unlocking Home Equity"
When you gain access to funds by unlocking your home equity; you're basically borrowing money from the bank by putting your home on the line. Just like any other loans, you're still required to service interests and financial charges and comply with all terms and conditions of the bank. Failure to do so could result in you losing your home!