What Is a Cash Back Mortgage? Everything You Need to Know

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It may not be very clear to choose a mortgage type as there are quite many types of mortgages in the market. There is a type that may interest you; it is the cashback mortgage option. If you’re still unaware of this kind of loan, then you should know that you’re certainly not alone in this. Even though they are not as popular as cashback credit cards, cashback mortgages are an option that has some advantages that might be perfect for some homeowners.

 

What Does Cash Back Mortgage Mean in the First Place?

A cashback mortgage is the kind of home loan in which one gets a fixed amount of cash after closing the mortgage deal. The sum one gets depends on the mortgage and it is usually between 1% and 7% of the whole amount. For instance, if you are to arrange a loan with a $200,000 mortgage and a 5% cashback offer, the cashback offered could be as high as $10,000. This is not pocket money that you can spend anyhow you want, though. Instead, it is closer to a bonus or to having the mortgage paid out in advance. The money you get can be spent on anything – whether to remodel your house, pay for other obligations, or even for a holiday. But you must not forget that you are still getting this money in the form of an advance, and you will be paying it on your mortgage balance.

 

How Does It Work?

When you apply for a cash back mortgage, the lender is going to take the application in the same way that they would take any other mortgage application. Lenders consider your credit score, income, debts, and the value of the real estate being bought or refinanced. If the lender approves the deal, then he will provide you with the mortgage loan amount and the agreed amount of cash back. The interest rate attached to cashback mortgages is usually a tad higher than that of normal mortgage loans. This is because the lender is giving you cash up front, and they must make up for that loss from the interest you will have to pay. Therefore, while you clear your cash now, you will be repaying it for the duration of your mortgage period.

 

The Benefits of Cash Back Mortgages

There are several benefits of cash back mortgages and flexibility is one of the greatest benefits that is associated with taking this type of mortgage. Having a large amount of money is always good, especially for first-time homeowners, since they may need cash to cover other expenses such as moving, making some repairs, or buying furniture for the new home. It also serves to roll over other expensive debts, such as credit cards, to your mortgage and save on interest charges. Another advantage is the fact that the cash can be functional as an emergency fund. Things happen in life, and it is good to have some extra money saved so that you would not be stressed out financially.

 

The Drawbacks to Consider

Still, cashback mortgages have their advantages, but they also come with certain disadvantages. The first disadvantage that can be noted is the interest rate which is higher than in other similar loans. A slight rise in the interest rate on your mortgage means a large difference in the amount you will have to pay in the long run. It is possible to pay more in interest than the cash with which you started, depending on the interest rate. There are also the mortgage terms that must be taken into consideration. Another drawback of cashback mortgages is that they usually have strings attached, which keep you bound to the mortgage for some time. However, if you can get a new mortgage out, you may incur stiff penalties, which will cancel out the cash back you received.

 

Conclusion

Cashback mortgages are yet another option for you to get some more money into your pocket when you purchase a home but with certain concessions. They are rather useful because they come with higher interest rates and other penalties if the mortgage is to be broken early. If so managed, the cash can be a boost that makes homeownership a little easier than people can anticipate. Just like with any financial decision, one needs to look at the advantages and disadvantages of each and decide which would be the most beneficial for him.

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