October 17, 2023 ~ Cashback Mortgages
https://peterpaley.com/cashback-mortgages/
Cashback mortgages are a mortgage product where the lender will charge a slightly higher mortgage rate in exchange for giving the borrower extra cash on closing.
You may be able to get up to 5% Cashback on the funded mortgage amount, pending different offers from different lenders.
For this example, we will use a cashback amount of 3%. If your mortgage was to be $300,000 the lender would increase the balance to $309,000 and give the borrower the extra $9,000.
What you need to know is that the lender will charge a higher mortgage rate to offset the amount of the cashback. A lender will usually charge between .15% – .40% of interest for each 1% of cashback you receive. In our 3% cashback example, the lender would normally charge 5.94% for a 5-year Fixed-Rate Mortgage. If you select the Cashback Option your rate would increase to 6.69%.
How does this affect your mortgage? Using our $300,000 – 3% Cashback example this is how the numbers would look.
Traditional Mortgage:
$300,000 – Mortgage Amount
5.94% 5-Year Fixed-Rate
$1909.00 Monthly Mortgage Payment
$269,281 – Mortgage Balance at the end of the term.
3% Cashback Mortgage:
$309,000 – Mortgage Amount
6.69% 5-Year Fixed-Rate
$2,105.00 Monthly Mortgage Payment
$289,210 – Mortgage Balance at the end of the term.
The difference in payments will be $197/month.
The difference in interest paid is $13,733.00
The difference in principal paid is $1,929.00
So why would anyone want to pay more for some cashback?
These products can offer a solution for clients if they are having a difficult time qualifying for a higher mortgage amount due to the stress test, the clients need to purchase furniture or other household items and don’t want to use a 20-28 % interest rate credit card or for other personal reasons.
While not for everyone, a cashback mortgage can be a tool be a homeowner sooner. With rent prices skyrocketing across the country (25%-30% in some areas) the cashback premium may be a smaller price to pay than paying higher rent.
We would be happy to review your individual situation and find the right mortgage solution for you.
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