What Is a Cashback Mortgage?
Cashback mortgages are home loans that give the borrower a lump sum of money at the beginning of the loan. They are popular among people who are trying to get cash to meet expenses and who have property that is worth more than it was when they first financed it.
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Function
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A cashback mortgage is an option when refinancing a home loan or when taking out a new loan to replace an existing one. The new loan has a higher principal than the old one because of the higher value of the underlying property. This can be a result of a change in property or appreciation of the value of the original piece of real estate. The cashback payment is the difference between the old remaining principal and the new, higher principal. The borrower must pay back the cashback amount, but it is incorporated into the mortgage structure.
Uses
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Cashback mortgages are used to get a large sum of money quickly, usually within a month. People use the money for various purposes, depending on their individual situations. Some have another loan that is about to come due, so they use the lump sum to pay off that debt. Others use the money for immediate expenses that are outside their budgets, like the costs associated with moving into a new home or remodeling their original home.
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Advantages
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Most people who take out cashback mortgages are drawn to them by the promise of a lump sum at the beginning of the loan, which can be up to six percent of the principal. They may use this payment to meet other financial obligations or to cover moving expenses. Some people use the cashback payment to bolster a savings or investment account because they think that it will create worthwhile returns in the long run.
Disadvantages
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While the lump-sum payment is attractive to some borrowers, it does not come without costs. Prospective borrowers should realize that using the lump sum to pay off another debt simply shifts the obligation to another lender. The cashback mortgage often comes with high interest payments and fees. The immediate payoff may provide temporary relief, but in the long run the mortgage may prove too costly to justify the choice of cashback over a traditional mortgage.
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