A cash back mortgage is similar to a regular mortgage in that you pay back either a lump sum or a regular monthly payment. However, instead of receiving money directly from the lender, you receive money back from the interest on your loan. This interest may come in the form of “cash down” or as interest accrued on a prepaid cash-card. Cash-back mortgages are available to both homeowners and non-homeowners. They differ slightly from traditional mortgages because they are not secured by the house and therefore open to foreclosure if the homeowner defaults.
Some mortgage lenders, especially in the UK, offer a one-time lump sum cash back mortgage payment to new customers at the start of a new mortgage. Often called cash-back, this lump amount is frequently marketed as free money, but in reality is already paid by the lender. The amount is returned by applying the new loan amount through the cash back provider, and is then credited to the applicant’s home loan account. The amount of rebate taken depends on the lender’s policy. Generally speaking, the more expensive the property, the larger the rebate; thus, the more cash back may be earned. Homeowners may find themselves paying as much as twenty or thirty percent more for the cash back portion of their loan, depending on the type and interest rate of their mortgage.
Typically, cash-back mortgages require the same process for approval as any other mortgage. In order to qualify for the cash-back plan, homeowners will need proof of income, employment status and current mortgage payments. Lenders also consider the value of the proposed purchase and will often require applicants to provide information on the property they want to buy. In addition, the lender will consider the lender’s policies regarding late payments and other issues that may affect the borrower’s ability to make payments on time. Reviewing the application thoroughly is recommended so that problems do not crop up later.
Cash-back plans are usually set up for five years, although some lenders offer fifteen year terms. However, most lenders require borrowers to repay the cash-back amount within a reasonable amount of time after the original mortgage term early. Paying back the amount early will reduce the amount of rebates paid and the savings from interest rates and other fees and charges. However, paying back the amount early allows borrowers to retain the property they own and use the equity in their home to purchase another home. When borrowers pay back the cash back amount early, lenders usually issue a second mortgage on the same property to cover the remaining balance due.
There are several types of cash back mortgages available to borrowers. The two primary types are borrowers who choose a variable-interest rate plan and borrowers who choose a fixed interest rate plan. Fixed-rate cash back mortgages have a pre-determined interest rate and a pre-determined rebate schedule. In a variable-interest-rate plan, the amount borrowers pay towards their mortgage is tied to the Bank of America’s prime rate or a predetermined, interest rate. If the prime rate rises, so does the amount borrowers pay.
There are many reasons why people consider cash back mortgage loans, but perhaps the most important reason is that borrowers receive cash payments during the first few months of the loan and during the first few years of the loan, after which the payments gradually decrease until the final payoff amount is achieved. For example, a cash back mortgage may pay borrowers less in interest during the first few months of the loan and may save them money in closing costs. Because the initial payment is less than the closing costs of a conventional mortgage, these loans often have a lower closing cost than conventional loans. Therefore, if you are planning to sell your home during the first few months of your loan, consider a cash back mortgage.
However, keep in mind that lenders may require you to provide proof of a steady income in order to obtain a cash back mortgage. A steady income is defined as at least a half-time salary or two month’s worth of job loss and consistent monthly expenses. To qualify for a steady income, you may need to provide proof of multiple monthly expenses, such as car repairs, insurances, credit card bills, and homeowners insurance. Be sure to provide the lender with a copy of your latest pay stubs. Lenders may also require you to sign an additional authorization form indicating that you are 18 years or older, have a social security number, and are currently employed.
Before you decide on a cash back mortgage, take the time to research several lenders. Meet with several lenders in person and request free quotes from each. Compare the interest rates from each lender and consider how easy it would be for you to make regular monthly payments while owning your new home. The first-time buyer of a home may want to consider a cash back option, but the best deal typically involves a fixed rate mortgage for the first-time homebuyer.
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