5% Cash Back is a Great Deal!

 

 

5% Cash Back is a Great Deal

The 5% Cash Back for a downpayment on the purchase of a home is a great deal for those who qualify, and is still being offered by some Lenders.

To qualify you need:

  • a credit score of 650,
  • a strong credit history of at least 2 years with a minimum credit limit of $2,000,
  • job stability of at least 2 years with the same employer,
  • plus some additional criteria.

In short, stability and proven financial responsibility need to be demonstrated.

Why is it such a great deal?

Let’s say you purchase a home for $200,000. If you have the 5% downpayment, you may qualify for the discounted mortgage rate of about 3.5% at today’s rates. If you qualify for the 5% Cash Back you would receive $10,000 for your downpayment. The cash back mortgage rate would be higher, about 4.85% currently, and it would still be a great deal. Here’s why.

Either way the mortgage would be $195,225 including CMHC Insurance, amortized over 25 years, having a fixed term of 5 years. The interest paid on the mortgage and the balance outstanding over the 5 years would differ:

5% Cash Back

Rate

Int. Over
5 Yrs.

Outstanding Balance

$10,000

4.85%

$44,283.25

$172,378.45

None

3.50%

$31,697.18

$168,440.18

Added Interest on Cash Back

$12,586.07

 

Additional Balance Outstanding

 

$3,938.27

Dividing the added interest of $12,586 by 5-years gives you $2,715 per year. Some view this per year amount as a high annual interest rate of 25% on the $10,000 cash back.

This added interest, however, can also be viewed as a repayment of the cash back with interest, the same as any other loan. To explain, the $12,586 includes the $10,000 cash back to be repaid plus $2,586 in interest on the cash back over 5 years. The annual interest now amounts to $517 ($2,586 ÷ 5 yrs) or 5.17%. The additional balance outstanding of $3,938 on the mortgage would also cause some negligible interest but over subsequent years.

Recoup Costs and More from Equity Gained

At a low average property appreciation of 2% annually, at the end of year 5, the home’s estimated value would be $221,000. Subtracting the outstanding mortgage balance of $172,378 would give you equity of $48,500.

Let’s estimate the additional cost of home ownership per year as follows. Taxes: $2,100, Insurance: $750 and allotment for maintenance: $2,500. Over 5 years this would total $26,500. Heat and electric would be expenses whether buying or renting.

The $48,500 in equity would allow you to recoup the repayment of the cash back including interest, the added cost of home ownership, and still give you some $9,000 in additional dollars. That’s hard to beat.  

The 5% Cash Back for a downpayment on the purchase of a home is a great deal for those who qualify, and is still being offered by some Lenders.

To qualify you need:

  • a credit score of 650,
  • a strong credit history of at least 2 years with a minimum credit limit of $2,000,
  • job stability of at least 2 years with the same employer,
  • plus some additional criteria.

In short, stability and proven financial responsibility need to be demonstrated.

Why is it such a great deal?

Let’s say you purchase a home for $200,000. If you have the 5% downpayment, you may qualify for the discounted mortgage rate of about 3.5% at today’s rates. If you qualify for the 5% Cash Back you would receive $10,000 for your downpayment. The cash back mortgage rate would be higher, about 4.85% currently, and it would still be a great deal. Here’s why.

Either way the mortgage would be $195,225 including CMHC Insurance, amortized over 25 years, having a fixed term of 5 years. The interest paid on the mortgage and the balance outstanding over the 5 years would differ:

5% Cash Back

Rate

Int. Over
5 Yrs.

Outstanding Balance

$10,000

4.85%

$44,283.25

$172,378.45

None

3.50%

$31,697.18

$168,440.18

Added Interest on Cash Back

$12,586.07

 

Additional Balance Outstanding

 

$3,938.27

Dividing the added interest of $12,586 by 5-years gives you $2,715 per year. Some view this per year amount as a high annual interest rate of 25% on the $10,000 cash back.

This added interest, however, can also be viewed as a repayment of the cash back with interest, the same as any other loan. To explain, the $12,586 includes the $10,000 cash back to be repaid plus $2,586 in interest on the cash back over 5 years. The annual interest now amounts to $517 ($2,586 ÷ 5 yrs) or 5.17%. The additional balance outstanding of $3,938 on the mortgage would also cause some negligible interest but over subsequent years.

Recoup Costs and More from Equity Gained

At a low average property appreciation of 2% annually, at the end of year 5, the home’s estimated value would be $221,000. Subtracting the outstanding mortgage balance of $172,378 would give you equity of $48,500.

Let’s estimate the additional cost of home ownership per year as follows. Taxes: $2,100, Insurance: $750 and allotment for maintenance: $2,500. Over 5 years this would total $26,500. Heat and electric would be expenses whether buying or renting.

The $48,500 in equity would allow you to recoup the repayment of the cash back including interest, the added cost of home ownership, and still give you some $9,000 in additional dollars. That’s hard to beat.  

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Diane Walker

Diane Walker

Broker
CENTURY 21 Today Realty Ltd., Brokerage*
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