Cash-Out Refinancing in Singapore: A Homeowner’s Mini Guide
By
Amanda Goh
|Published 06 Jul 2021 3 minutes
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At a glance…
A cash-out refinance is an option that replaces an old mortgage with a new home loan. As the new home loan is usually more than you owe on your house, the difference in amount goes to you. This amount is allowed to be spent on various news such as home improvements, debt consolidation and more.
While traditional refinancing allows you to replace your old mortgage with one with the same balance, cash-out refinancing allows you to replace an old mortgage with a new loan that is usually more than you owe on your house.
Important information
Cash-out refinancing has a slightly higher interest rate due to a higher loan amount and limits the cash-out amount to 80%-90% of your home’s equity. This means you won’t be able to pull out 100% of your home’s equity.
If you are considering cash-out refinancing, it is good to know more about the benefits and risks of doing so.
Pros of Cash-Out Refinance
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Lower Interest Rates
As compared to a home equity loan, a mortgage refinance usually offers lower interest rates. If you bought your home when mortgage rates were higher, a cash-out refinance can also help provide you with even lower interest rates. -
Tax Deductions
These deductions are available if you intend to use the money to buy, build or improve your home substantially. -
Higher Credit Score
Paying off in full can help improve your credit score by reducing your credit utilisation ratio. This means the amount of credit you are using will also reduce. -
Debt Consolidation
When you use money from a cash-out refinance, it can help save you money in terms of interest.
Cons of Cash-Out Refinance
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Closing Costs
Similar to any refinance, you will need to pay a closing cost, typically consisting of 2%-5% of your mortgage. Before opting for cash-out refinance, you should ensure that your savings are worth this cost. -
Foreclosure Risk
If you are unable to make the payments, your house may be collateral. Thus, you should ensure that you are able to pay off this debt without the possibility of losing your home. -
New Terms
As compared to original loans, cash-out refinance has different terms. It is important that you double check these terms before agreeing to them. -
Private Mortgage Insurance
You will need to pay private mortgage insurance if you borrow more than 80% of your home’s value. Insurance usually costs from 0.55% to 2.25% of your overall loan each year. -
Enabling Bad Habits
Before opting for cash-out refinance, you should ensure that you do not have any bad spending habits that may result in an increase in your credit card balance.
Overall Thoughts
Cash-out refinance can be the way to go if you have a good interest rate and good spending habits. As opting for cash-out refinance is a big decision, it is important that you take time to do proper research and know the benefits and risks of it before doing so.
