How To Get An Equity Term Loan

How Do You Get An Equity Term Loan?

There are many types of loans that can meet your financial needs. One such example is an equity term loan.

An equity term loan offers a one-time lump sum with flexible long-term repayment, provided your property has enough equity.

Besides, equity term loans will not overwhelm you with a high mortgage. You only have to be eligible for the loan.

We’ll look at equity term loans in Singapore in this article, including their eligibility requirements, advantages and drawbacks, and how to use the loan.

What Is A Term Loan Or Equity Loan?

When you buy a private property, its market value and your ownership shares – termed as equity – increases as you repay the mortgage.

Hence, you can use the property’s equity to borrow from lenders to fulfil your goals or get cash to handle an emergency.

Lenders offer a term loan when you use your home’s equity as collateral if you haven’t fully paid your mortgage.

Meanwhile, they give equity loans when you use your fully paid home as collateral. Most banks award up to 70-80% of your property’s current market value.

How To Check Your Eligibility

Home equity loans can help you make good use of money sitting around on your property. However, you must meet certain conditions to qualify for the loan.

Here are the most critical factors that determine your eligibility for an equity home loan.

A Credit Score Range Of 1,844-2,000

Financial institutions will check your credit score and grade before granting you a home loan. Banks use your credit score and grades to determine your likelihood of defaulting if you are granted the loan.

You’ll be more likely to get a home loan if you have a good credit score and grade, while a low rating is likely to disqualify you.

Credit Bureau Singapore (CBS) reviews your loan repayment history and outstanding debts to determine your score and grade on your credit report.

CBS uses a score rating of 1,000-2,000 and awards grades between AA and HH against the scores.

Those with a poor history of loan repayments will fall on the lower side of the scale, while those with a history of prompt repayments will attract a good rating.

Your credit score must be between 1,844-1,910 BB and 1,911-2,000 AA to qualify for a home loan.

A credit score of 1,825-1,834 CC might affect your chances of getting the loan. But if your credit score is between 1,813 DD and 1,000 HH, you will not be eligible for an equity home loan.

Equity of at least 15%

Lenders prefer if you have an equity of at least 15% of your mortgage to get an equity loan. That means you need to have more than 15% shares in the value of your property before applying for an equity or term loan.

However, the equity percentage sometimes varies depending on the lender and the amount you want to cash out.

History Of Prompt Bill Payments

Lenders also want to know if you usually pay your bills on time when deciding if you qualify for a home equity loan.

Suppose you have a negative history of taking longer to pay your bills or debts in your credit report. Lenders will consider you to be an unreliable borrower, which may lower your eligibility for the loan.

A Consistent Income Source

You must have a stable source of income in order to be approved for a home equity loan. A stable income source shows you can make monthly contributions towards the loan repayment.

Your Debt-To-Income Ratio Must Be Below 50%

Banks use the debt-to-income (DTI) ratio to determine how risky it is to lend you money. In general, lenders would want your debt-to-income (DTI) ratio to be below 50% to be eligible for a home equity loan.

However, other financial institutions may want a debt-to-income ratio that is lower than 43%. Find out from your bank before applying for a term loan.

To know your debt-to-income ratio, take the total of all your monthly bills and other financial obligations, and divide the sum by your gross monthly income.

Factors To Consider

Applying for an equity loan shouldn’t be an automatic decision after knowing you are eligible for it. As any loan can become a financial burden if mismanaged, you must consider various factors before proceeding with the application.

Here are the most critical factors to remember when getting an equity home loan.

Interest Rates

While home loans have relatively lower interest rates, you must check the current market interest rates against your lender’s rates. If the interest rate is higher than other types of financing, consider other loans instead of an equity loan.

Terms Of The Loan

Equity term loans can be short or long term. If you are in a better financial situation, a short-term loan is ideal since you can repay it faster.

However, long-term loans are ideal if you want to make lower monthly contributions over a longer period.

How Long It Takes To Obtain The Loan

While it’s fairly simple to get an equity term loan, it’s essential to consider the period from loan application to disbursement, especially if you have an emergency that needs quick funds.

Additional Costs Required

Before taking an equity loan, check with your lender about additional fees such as taxes, and disbursement and closing costs.

These additional costs can reduce the amount you cash out or increase your monthly repayments. Opt for other financing forms instead of home loans if the extra costs are too high.

Available Tax Benefits

If there are any tax advantages related to home loans that other loans don’t have, then getting an equity loan can be a good idea. Ask your bank about any tax benefits associated with your loan before taking one.

Pros And Cons

Here are the benefits of equity home loans.

They Have Lower Interest Rates

Equity loans offer a lower interest rate compared to other types of loans. Since they use your property’s equity as collateral, they have lower interest rates, unlike unsecured loans such as personal or credit card loans.

They Have A Fixed Interest Rate

Lenders usually determine equity interest rates during your application, which remain constant throughout repayment.

Fixed interest rates are beneficial since you can plan for your monthly repayments without worrying about fluctuating market interest rates.

Easier To Obtain

You don’t need a lot of documents and prolonged processes to obtain an equity loan. Its simple and fast processing makes equity loans ideal for urgent financial needs.

Longer Repayment Period

Depending on your age, equity loans can provide you with a lot of time, up to 30 years, to repay the loan, resulting in lower monthly contributions.

Here are two disadvantages of equity loans worth noting before applying.

High Risk Of Foreclosure

If you default on monthly repayment contributions, your home may be foreclosed. Through the court, your lender can sell your home to the highest bidder to repay your debt.

You Can Lose Your Home’s Value

Although you have the freedom to spend the cash as you please, you may lose your home’s value with a long-term financial burden in the end.

This is especially true when you spend the money from your loan on luxury goods at the expense of having a roof over your head, or when you invest in a failed business.

How Much Can You Cash Out?

There’s no definite amount you can cash out from equity loans, as this depends on several factors, such as:

The current market value of your home: An increase in the current market value of your home fetches a higher cash-out value.
CPF amount used to buy your property: Lenders don’t include CPF contributions in the initial downpayment of your home.
Outstanding home loan debts: Banks don’t include pending mortgage debts in your total cash-out amount.
Disbursement and other fees charged: These will be deducted accordingly.

To sum it up, the amount you can cash out is the value obtained when the sum of CPF contributions, outstanding mortgage, and fees charged are deducted from 70-80% of your home’s current market value.

How Should You Use The Extra Cash?

You have the freedom to use your cash out however you please.

But reckless spending can hurt your financial health in the long run, and you might subject yourself to the pitfall of long-term debt that you could otherwise avoid had you used your money well.

The best decision is to distribute your cash to areas where you know you bring in more money or ease when servicing the loan.

For instance, if you have unsecured debts with high interest rates, spend some cash on repaying the unsecured loans, so they don’t compound more than you can pay.

You can also invest the cash in businesses that have the potential to bring in money, which can help you repay your equity loan. However, starting a business can be risky if you don’t research, plan, and execute properly.

If you lost your source of income recently, you could use the cash to pay your monthly bills to sustain your family. You could also put aside an amount to repay your loan as you figure your way out.

Using your equity cash on a world-class trip or wedding could be unwise.

Find Out More About An Equity Term Loan Today

Equity loans can be a good solution when you are in a financial fix and need a way out fast. However, putting your home equity as collateral can sometimes be risky. Thus, it may not be the best solution when you have several loan options.

If you need financial assistance, licensed money lender Horison Credit is ready.