The 4 Benefits Of A Cash Out Refinance Option In Malaysia
The already volatile market became more unpredictable, with some areas dropping in value, while others saw a good appreciation from the previous year.
It is still safe to say that a property originally purchased 10 years ago would have enjoyed an increase in value – the only question is, how much?
First of all, let’s take a look at what property value is, and the factors that affect its growth. Property value is essentially the agreed selling price between buyer and seller.
The market value of the property is what guides the seller in not underpricing their property, and prevents the buyer from purchasing an overpriced property. This value can inflate and fluctuate over the years due to a number of factors.
Some of these factors like size, nearby amenities, and public transport are fixed variables and will help your property’s value to increase steadily.
Here’s the good news. You don’t need to sell off your property to capitalise on its increase in value. The alternative is – cash out refinancing!
How Does Cash Out Refinancing Work?
When you choose to refinance a loan, you replace it with a new loan with different rates, tenure or monthly payment but still owe the same amount.
Cash out refinancing is slightly different. Using your home as collateral for some extra cash, you can create a new loan for a larger amount than the original loan, and receive the difference between the two loans in tax-free cash!
In other words, you can “cash out” the increase through refinancing, as it provides extra collateral for a bigger loan.
This is a more preferable option, compared to taking on a second mortgage, as it doesn’t add another monthly payment to your list of existing commitments.
For example, you purchased a property for RM600,000 and you have paid off RM100,000. This means you still owe RM500,000 on your home. You then decide you want to carry out RM20,000 worth of renovations.
Cash out refinancing means that you take a portion of your built-up equity, and add it onto the existing loan.
This means your new loan is now RM520,000 – the remaining RM500,000 on the original loan plus the RM20,000 you just took out. You should receive the RM20,000 a few days after successful closing of the refinancing.
You can then do anything you want with the funds you have just cashed out. It could be property upgrades, paying for your education, even as backup savings for unexpected medical situations or rainy days.
Benefits Of Cash Out Refinancing
There are numerous benefits of choosing cash out refinancing compared to rate and term refinancing. Some of them are as follows:
1) Quicker approval
Since cash out refinancing is based on an existing loan, you may avoid a tedious approval process.
As long as your lender has your latest home value, it can be processed once you provide the necessary documentation, and the extra funds deposited into your account within days of completed loan approval.
2) Lower interest rates
Refinance rates tend to be lower than interest rates on other types of debt, making it a comparatively cost-effective way to borrow money.
Using the cash to pay off other debts such as credit cards or another loan means you’ll be paying a lower interest rate on that debt.
3) Consolidate your debts
In comparison with credit cards and personal loans, mortgage loans are the cheapest financing option.
In terms of debt consolidation, refinancing can be beneficial if you have accumulated debts with interest rates that are higher than those of a mortgage loan. It also makes it a wiser choice than taking out a new personal loan.
4) Healthier credit score
When you use the funds from cash out refinancing to pay off your other loans like credit cards in full, it helps to build your credit score by reducing your credit utilisation ratio, which is the amount of available credit you’re using.
Checking Your Property’s Value
A professional home valuation can be expensive, not to mention time-consuming, hence it would not be an ideal choice if you are merely looking into the possibility of cash out refinancing.
Luckily, there are automated valuation machines (AVM) which can automatically generate property value estimates by comparing recent transactions of similar properties based on location and built-up. This greatly speeds up the process of cash out refinancing.