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A Primer on Cash Back Mortgages

Posted by  on Apr 16, 2009
 
A Primer on Cash Back Mortgages

To help themselves get ahead in the long run many people decide to purchase a house as an investment. The problem comes that they do not have substantial financial means to obtain their desired home. Banks and lending institutions have come up with the idea of Cash Back Mortgages in which a mortgage is given out as well as an additional amount of money to help with any unexpected expenses a person might have. These Cash Back Mortgages help people with good credit to get on the path of becoming a homeowner.

What is a Cash Back Mortgage?

The idea of a Cash Back Mortgage helps people to obtain a house immediately instead of saving up enough extra money, on top of the down payment, to cover extra costs such as moving or to perhaps help consolidate debt in order to improve their overall credit score. The loan is usually taken out for the amount of the home, plus an extra amount usually around 5%. The entire loan has to be paid back over a set amount of time, but this extra amount of money helps the borrower in the present to obtain what they financially desire. If you were to take out a Cash Back Mortgage for a $300,000 home, you would most likely receive a loan for around $315,000.

Why Would You Get a Cash Back Mortgage?

A Cash Back mortgage can be obtained for many reasons. The most common use of a Cash Back loan involves consolidating debt to obtain a lower interest rate on the money you owe. Perhaps you have 2 or 3 credit cards with outstanding balances; the money can be used to pay them off so only 1 monthly payment is necessary. Other options include investing the money in the house, perhaps by decorating or adding additions to the house to increase the overall property value of the investment. A third viable option includes the ability to offset rate increases over the lifetime of a loan. Since these loans are adjustable rate mortgages, a rate increase could add to the overall interest that needs to be paid. With the extra money handy the raise in interest rates will not automatically lead to a borrower defaulting on his or her loan.

What are Some Disadvantages to a Cash Back Mortgage?

The biggest downfall of the Cash Back Mortgage involves the fact that you are taking out more money than necessary to pay for the home. Although this can be good it will lead to higher monthly payments, as well as more interest that must be paid to the lender overall. The extra 5% monetary value can amount to a strain on a person’s monthly budget.

Another downfall comes in the latter parts of the loan. Because the loan is an Adjustable Rate Mortgage the interest rates on the loan could dramatically increase. At the initial signing of the loan a person may think they can manage the payments but once the rates start to increase they may be forced to default on the loan leading to extremely bad credit.

How do you make the Most of a Cash Back Mortgage?

Making secure financial decisions with the extra money obtained can lead to an overall better lifestyle if done properly. The money should be applied to an area that will benefit the borrower in the long run, such as paying off previous debt or investing the money so that the benefit of the extra money outweighs the overall extra cost incurred by taking out a larger loan.

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