Home Equity Loan: Dollars & Good Sense
If, like Mark, you qualified for a home equity loan, unsecured loan and credit card loan, with rates of 9.5%, 25% and 50%, respectively per annum (p.a.),which one would make the most financial sense? Obviously, the one with 9.5% p.a., as you would pay less interest; therefore saving you the most dollars and making the most sense. Recognizing this, Mark realised the equity in his home could be the exit to his debt-trap and the door to greater financial freedom.
Your home’s equity is essentially the portion of your home that you ‘own’, that is, the amount of your home's current value that is free and clear from a mortgage. In Mark’s case, his home is worth J$15 million and his mortgage balance is J$10 million, so his equity is J$5 million. A home equity loan or second mortgage uses the equity in your home, as the collateral.
Do you need a sizable amount of money to cover your children’s education, home improvement, or pay down a hefty credit card balance? Let us explore whether a home equity loan could be the best choice for you too.
The ‘Dollars & Good Sense’ of Getting a Home Equity Loan
Mark’s home was more than just a house, it represented many years of sacrifice, security in his golden years, the place memories were created and his children’s inheritance. So the thought of losing his home made him apprehensive to use it as collateral. So why did he?
• Fees: The JMMB Home Equity Loan attracts processing fees; stamp duty; valuation and surveyor’s report costs. However, when the fees and interest repayment over the life of the loan are matched against an unsecured loan or credit card for the same tenure, the home equity loan is a less expensive option.
When Mark compared home equity loan rates of approximately 9.5% p.a. to approximately 25% p.a. on a typical unsecured loan, taking the unsecured loan would have meant choosing to pay more than double in interest payments. If instead he opted to pay at least the minimum balance on his credit card balance rather than pay off the credit card each month, he would have chosen to pay more than 5 times more in interest. This neither made dollars nor good sense.
• Affordability: The average tenure of an unsecured loan is 5 years, while the home equity loan tenure gives up to15 years to repay. This longer repayment period gives you a more affordable monthly repayment amount. Mark’s advisor showed him that the additional funds, saved with a lower monthly payment, could be invested at a higher rate of return than his loan rate. When he saw that JMMB’s Optimum Capital Unit Trust and Income and Growth Unit Trust had yielded 90% and 175% respectively, over the last five years, he envisioned his future financial freedom.
The repayment period for the home equity loan can also be shortened, by paying extra towards the principal each month, or making lump sum payments from bonuses, additional earnings or gifts. However, it best to seek expert financial advice as to whether this would be the best financial decision for you at that particular time.
• Processing Time: A home equity loan typically takes approximately 4 to 6 weeks to process, as opposed to an unsecured loan, which can be completed within 3-7 business days, or a credit card which can be available within 2 weeks, if you are just applying for one. However, like Mark, with early planning you the considerable savings, can be worth the wait.
Do you need over J$100,000 to cover your children’s education, home improvement, or pay down a hefty credit card balance? If you have equity in your home, please give us a call on (876)998-5662 or text GOOD SENSE to (876) 822-5662.
Written by: Michelle Sinclair Doyley, Manager, Client Financial Education, JMMB Group