Majority of your savings to purchase a home goes towards covering the down payment of the mortgage. That creates a need for a little bit more cash to cover other expenses such as closing costs, moving costs, renovations, property taxes or insurance costs.
To cover these extra costs, homeowners can use rest of their savings, use credit cards or borrow from family and friends. But this might not work for everyone. The last thing you would want is to spend all the money you have and become a broke homeowner. Or borrow too much from credit cards and get into more debt.
In order to help homeowners in this tough situation, some lenders have created a cashback mortgage. Cash back mortgages let homeowners borrow up to a certain percentage of their total mortgage amount. Ranging from 1% to 7%, cash back mortgages can help homeowners with their cash flow.
For example, if you are purchasing a $250,000 home and putting 20% ($50,000) in down payment, your mortgage balance will be $250,000 - $50,000 = $200,000. And if your lender is offering 5% cash back, that means you canget $10,000 in the cash back.
Please remember, cash back mortgages are not free!
For lenders, cash back mortgage is just another way to make more money. It is not complimentary and can be very costly if homeowners don't pay attention to the numbers.
Things you should know about cash back mortgages
- Banks charge higher interest rate as a premium when they provide cash back mortgage
- Lenders have an eligibility criteria for cash back mortgages, not all mortgages or clients are qualified
- Most lenders don't offer cash back mortgage on a variable rate term. That means in order to get cash back; you have to get a fixed rate mortgage
- If you decide to break your fixed rate mortgage (such as refinancing or simply selling the property), then the lender will require you to pay back the total cash back amount