First, here are the differences between Regular Refinancing and Cash Out Refinancing & how they work
A cash-out refinance is a type of mortgage refinancing when you pay off your existing home loan by getting a new one that’s larger than what you currently owe. You will get lump sum monies (minus any moving costs) for the difference to use as you wish.
Regular refinance, on the other hand, is much more suitable for those who seek to change the loan term, monthly payment, or interest rate. And, you won’t see the money, it’ll just be part of the reduction of your monthly payment.
How much money can you get on a cash out refinancing?
A cash-out refinance is only an option if you have enough equity in your home. Also, take note that the average amount of equity that you can withdraw is based on the banks’ (lenders) limit and your Debt Servicing Ratio (DSR).
For example, your home is worth RM1 million now and you have RM400,000 left on your mortgage. That means you have RM600,000 in equity. If you opt with Bank of China, you could do a cash-out refinance for up to 90% of your home’s value, which in this case would be RM900,000.
|
Home Value |
Homeowner’s Equity |
Amount Owed on Mortgage |
New Cash Out Refinance |
Refinance Amount Less Amount Owed |
Moving Cost (3% of total loan value) |
Cash paid Out To Homeowners |
|---|---|---|---|---|---|---|
|
RM1,000,000 |
RM600,000 |
RM400,000 |
RM900,000 |
RM500,000 |
RM27,000 |
RM473,000 |
However, that wouldn’t quite leave you with an RM500,000 payout. This is because moving costs (bank processing fees, legal fees, stamp duty, disbursement fees, a new MRTA and S&P) will be taken out of what you’d get back and could be up 2% to 3% of the total loan value.
What are the few things to keep in mind before opting for cash out refinancing?
1. Lock-in period for existing home loan
FYI, terminating your loan prematurely may result in early exit penalties. This typically ranges from 2% to 3.5% of the original loan amount. For example, if your home loan amount is RM500,000, then the penalty would be RM17,500 (3.5%). That’s a lot of money!
You also might think that you’ll get away if you were on Zero Entry Cost packages (e.g. Valuation Fees, Legal fees absorbed by the bank). Hmm, not really - there are potential clawback charges.
2. Current financial health (CTOS/CCRIS)
When was the last time you checked your credit health? Since refinancing requires you to submit an entirely new loan application, lenders will do their due diligence even if you've already been a customer for some time.
So if you want to get the best rate possible and increase your chance of having a loan request approved, focus on improving your credit score and debt-to-income ratio before refinancing your mortgage.
3. Cost to refinance
Just like when you bought your home, you’ll have to pay moving costs for your refinancing as well like bank processing fees, legal fees, stamp duty, disbursement fees, a new MRTA and S&P.
Hence, it’s important to consider what a cash-out refinance could cost you because the fees might not be worth it, especially if you’re not borrowing a large amount. As mentioned before, expect about 2% to 3 % of your refinancing amount. You could also estimate the possible cost of refinancing by using our Home Loan & Stamp Duty Calculator. Stay in your budget, people.
4. Motives to cash out refinancing
A cash-out refinance lets you use your home equity to pay for anything you want. Of course, just because you have access to this cash doesn’t mean you should. Based on our observations, most homeowners use the proceeds for the following reasons:
-
Home Renovations: Building up savings to complete home renovations and repairs can be tough. Cash out refinancing may be a better solution for you to accomplish your home improvement goals so you don’t have to rely on credit cards and/ or personal loans.
-
Investment purposes: Cash-out refinances offer you access to capital to help build your retirement savings or purchase an investment property/business needs. But, it is only worth it if the investment returns are higher than the loan interest rate.
-
Child’s Education: Education is expensive, so tapping into home equity to pay for college can make sense if the refinance rate is much lower than the rate for a student loan or personal loan.
How do I apply for a cash out refinance of my existing home loan?
The cash-out refinance process is similar to the process you undergo when you buy a home. So do ensure you meet the requirements and choose a lender that fits your financial needs and apply. FYI, you don’t have to stick with the current lender. We advise you to shop around - get at least three quotes and then, go with the option that will save you the most money.
If you’re already hunting for a cash-out refinancing option, Bank Of China (Malaysia) Berhad’s Flexi Housing Loan should be part of your consideration because it can help you save on interest. How? The product combines a Current Account with Home Loan to make it easier for you to plan your repayment.
If you have any extra cash left from your cash out refinancing, deposit the money in the Current Account at any time to knock off the loan balance and subsequently reduce the loan interest. In short, the higher the deposits, the lesser loan interest you’ll have to pay (subject to the maximum set off-limit imposed by the bank). Furthermore, BOCM is running a good promotion rate from as low as 2.85%* p.a. For more info about BOCM Flexi Housing Loan, call their Sales Team at 03-23878232/03-23878815 or visit any of their branches nationwide!
Additionally, you can use Loanstreet’s Home Loan Refinancing Comparison tool to compare your available options. Once you are happy and certain about doing a mortgage refinance, you can continue by submitting an application to Loanstreet for the fastest and best results.
*Terms and Conditions apply.
**The above article is intended for informational purposes only. Loanstreet accepts no responsibility for loss that may arise from reliance on information contained in the articles.
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