Cash Back Mortgages Explained

Cash back mortgage is a sales technique that offers borrowers additional spending money up front.

by Mortgage Fit, LLC

July 14, 2004

Cash back mortgages are a relatively unknown type of mortgage among the average consumer. It gives cash incentive to a borrower, in addition to the money he or she is going to borrow. Mortgage Fit, LLC, an unbiased mortgage site committed to helping individuals and families nationwide with mortgage related issues, has prepared this guide to help explain what cash back mortgages are about.

Cash back mortgage is a sales technique, which allures a borrower to take out a mortgage with the particular mortgage lender. As a technique it gives a cash incentive to a borrower, in addition to the money he is going to borrow. By this type of mortgage deal, a borrower can pay off his credit card debt, home furnishing debt, moving costs, etc. It is a very suitable marketing tool for first time buyers and a boon for those who use short term finance arrangements to fund a deposit.

Simply, a cash back mortgage is a kind of mortgage, in which a borrower is paid a set percentage of amount borrowed, as a cash payment on completion of the mortgage.

Cash back mortgage is the best solution for a borrower, who prefers funds at the outset of the mortgage. It can offer anywhere between 1% and 12% cash back. It is not a specific variant of a mortgage, but a specific use of it. As a mortgage deal, it offers a security blanket to the borrower where he can save thousands of dollars by the cash back scheme backed with it. A borrower can reduce his current mortgage interest rates by permitting an immediate buy down of lenders principal amount.

There are two standard repayment methods for cash back mortgages:

1. Straight repayment method.
2. Interest only payment method.

Straight repayment method- Sometimes known as traditional repayment method. Here, borrower’s monthly mortgage payment is used partly to cover the interest owing on the mortgage and partly to reduce the loan itself. In the early years most of the monthly payment covers interest, the loan amount reduces more rapidly in the later years.

Interest only payment- With this method a borrower only covers the interest owing on the mortgage, the amount borrowed remains the same. It also requires regular payments to a savings plan.

1. Wants to renovate, refurnish or decorate his home.
2. Would like to take a dream vacation.
3. Wants to prepare for any unexpected expenses.
4. Wants to make an additional lump sum payment on his mortgage.
5. Wants to renew an existing mortgage early and be able to cover the pre-payment costs.

1. It pays lump sum to the borrower when the mortgage is taken out.
2. It is suitable for the first time borrower. It helps them to obtain a mortgage when they are unable to raise a deposit.
3. It acts as an incentive to borrowers who require the funds to pay professional fees, make home improvements, buy furniture, etc.
4. It offers tax benefits to the borrower.

Disadvantages of cash back mortgages:

1. Lack of flexibility or competitiveness on the interest rate.
2. A borrower has to pay extra fees such as cancellation penalties, administration cost, etc.
3. It may be very costly in the long run.
4. A borrower has to pay a very high standard variable rate of interest.

In spite of its various benefits, these mortgages are sometimes not recommended. But, cash back mortgages have few disadvantages, and several positive points. So it depends upon each borrower's needs.

For more queries related to mortgages, feel free to visit Mortgage Fit, LLC: http://www.mortgagefit.com