One of the marketing techniques used by banks today is to give "cash-back" incentives for taking their mortgages. If it sounds too good to be true, it usually is. How much does that cash-back actually cost the client?
You can be assured that if the bank is giving a cash-back, the client will not be given the best available mortgage rate. The following is an example of a mortgage transaction that was recently witnessed by a mortgage broker.
The client approached the broker with an application for a mortgage of $200,000.00. The broker was able to provide a mortgage commitment for 5.25% for a 5 year term and a 25 year amortization. That same day, the client's bank produced a commitment for a mortgage of $200,000 at 6.40%, for a 5 year term and a 25 year amortization, with a 5% cash-back to be paid on closing. Let's compare the two mortgages!
|
5.25% No Cash-Back |
6.40% 5% Cash-Back |
|
| Mortgage Amount | $200,000 | $200,000 |
| Monthly Payment | $1191.84 | $1327.55 |
| Total Payments (60 months) | $71510.28 | $79653.00 |
| Balance at Maturity | $177702.49 | $180668.17 |
| Interest Paid | $49212.89 | $60321.17 |
This comparison is based on the fact that the client really didn't need the $10,000 cash-back to close the transaction. What if the client had needed that money. How much did he actually pay for the privilege?
| Amount of Cash-Back Received | $10,000.00 |
| Amount of Extra Interest Paid over the term | $11108.28 |
| Amount of extra interest paid per year (average) | $2221.66 |
| Annual Rate of Interest Paid on that Cash-Back | 22.21% |
Based on the above, the client is actually paying 22.21% interest on the cash back, plus after 5 years he still owes almost $3000.00 more than if he hadnt have taken the cash back. It might have been cheaper to take a cash advance from his credit card .it definitely would have been cheaper to find another alternative.
In very few cases will the client come out ahead taking a cash-back option vs a discounted mortgage. Be careful what your bank promises you .it might not be in your best interest!
Rates For
Fri, Jul 30, 2010
6:05 am
| 1 Year (Closed) | |
| CIR: 2.70 | Bank: 5.65 |
| 1 Year (Convertible) | |
| CIR: 2.70 | Bank: 5.65 |
| 1 Year (Open) | |
| CIR: 2.70 | Bank: 5.65 |
| 2 Years | |
| CIR: 3.45 | Bank: 3.65 |
| 3 Years | |
| CIR: 3.5 | Bank: 4.1 |
| 4 Years | |
| CIR: 3.89 | Bank: 5.24 |
| 5 Years | |
| CIR: 4.19 | Bank: 5.80 |
| 7 Years | |
| CIR: 5.15 | Bank: 6.0 |
| 10 Years | |
| CIR: 5.49 | Bank: 6.19 |
