How Much Cash Back Does a Cash Back Mortgage Offer?
Cash back mortgages are not a loan, per say, but they do provide home owners with “free cash” when they first purchase their new homes. Cash back mortgage is a mortgage with an agreed upon amount of cash that the loan applicant (borrower) receives after closing on the property. Usually this amount of cash is paid back on an installment basis, with each installment equal to a predetermined amount of money. If, for whatever reason, the home owner does not have this money to spend immediately upon closing, the lender may offer to return the loaned amount to the borrowers in three to five years, or in monthly increments of a certain dollar amount each year.
Some mortgage lenders, especially in the UK, offer a one-time lump sum cash payment as a reward to new home loan borrowers. Sometimes called cash back, this lump amount is often advertised as free cash, although in actuality it is already financed by the borrower’s mortgage payment. The amount of money paid back (interest plus finance charges) is then subtracted from the total amount owed on the mortgage so the borrower owes less each month. For example, the cash back mortgage in effect may pay a couple hundred pounds in interest over the term of the loan, whereas the amount actually due would be several thousand pounds.
Another way to receive a cash back mortgage is to refinance the loan with a fixed interest rate and change the terms of the loan. Sometimes, the interest rate can be lowered significantly while maintaining the same cash back amount. In addition, if a home owner receives additional credit on his or her credit file the cash back mortgage provider may allow for an option to upgrade the status from non-qualified to qualified or unqualified. This would let the borrower to switch to a higher interest rate without having to get a cash advance, which could result in an interest rate increase and possibly tax-free payments.
The most attractive option is to get cash back mortgages with longer repayment periods. These have the potential to save the homeowner hundreds of pounds a year in interest charges. However, longer repayment periods mean that there are fewer payments made out each year. A typical length of a five-year fixed rate cash-back mortgage is sixty years, while a ten-year fixed mortgage comes in at ninety years.
To take advantage of lower monthly payments, look for lenders that provide an extra interest-free period. Some lenders require that borrowers opt in for the extra interest free period, and many require that borrowers commit to paying off the entire loan before it becomes fully-taxed. The longer the interest-free period, the more money you save because you will no longer owe tax on the interest. If the additional interest on the cash rebate is not offset by the lower monthly payment, borrowers should be prepared to pay taxes on the cash rebate over the full five-year repayment term.
To determine the best cash-back mortgage offers, shop around. Different lenders offer different terms. If you plan to move, you should check whether your lender will match the cash-back offer if you move. You can also use quotes from local brokers to determine which lenders have the best terms. While you can use the quotes to compare offers, they are not always reflective of the best deal available.
If you already have a conventional mortgage and would like to apply for a cash back mortgage, you should ask your lender’s about a cash-back conversion. With a conversion, your existing mortgage is renewed at current interest rates. You can get up to two points waived (otherwise known as the closing discount) on the new mortgage. While you can save money initially, be prepared to pay fees and points. The conversion may also affect the length of your loan term.
To determine the amount of cash you will be entitled to, add the down payment for the new property to the price of the old one. Then subtract the buyer’s down payment from the total amount. The buyer will receive cash back on the difference, known as the closing cost. You should also ask your lender about any other fees or charges, you will be required to pay. These could include application fees, appraiser fees, homeowner’s insurance premiums, private mortgage insurance and inspection fees.