Cash back mortgages make the most sense for first-time homebuyers purchasing homes for less than $500,000 with a minimum 5% down payment.
When buying a home, it’s easy to overlook closing costs, especially as a first-time homebuyer. Closing costs typically add up to between 1.5% and 4% of the purchase price of a home. As the borrower, you’re responsible for covering them out of your own pocket. Your lender won’t cover them. The great thing about a cash back mortgage is that you can use the cash to cover closing costs, such as home inspection fees, real estate lawyer fees, land transfer taxes, new furniture and movers.
But you don’t have to use the cash back towards your closing costs. You can use it as you see fit. For instance, you could use it towards home renovations or building an emergency fund.
Cash back mortgages do have their shortfalls though. Before signing up for one, it’s important to ensure you fully understand how it works.
They say there’s no such thing as a free lunch when it comes to money and the saying holds true for cash back mortgages. Getting cash back on your mortgage may sound like a great deal, until you realize that you’re most likely paying a higher mortgage rate in exchange for the cash back.