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Consider Cash Back Offers Cafefully

With the real estate market once again getting heated, the mortgage marketing campaigns from the financial institutions are also heating up. One of the most common of the offers tempting consumers is the offer of getting cash back for your mortgage business. This often is available for both new purchases and the refinancing of existing mortgages.

It was only a couple of years ago when this was the hottest new offer in the industry. In today’s market it seems that every other financial institution in the country is offering this cash back option.

An example of the typical cash back offer on the market is 3% cash back when you sign up for a term of 5 years. Now here is where the catch comes in. Typically when you accept this offer you are taking the cash back option in the place of a rate discount.

So what does this mean to consumers? As always I would recommend that you crunch the numbers before you jump at any of the offers on the market. In today’s market it is not unreasonable for consumers with good credit and verifiable income to command a 1% discount on closed term mortgages. Some consumers are even able to get 1.05% off posted rates on the closed term of their choice.

To see how the numbers work out, let’s take a look at a comparison between what you get from a cash back offer versus what you save with a 1% rate discount. Let’s assume that you require a new $150,000 mortgage that you plan to amortize over 25 years (the standard). Lets also assume that the posted rate on a 5-year term is 8.35%. With the cash back offer you will receive $4,500 at the time the mortgage is advanced and in turn accept a rate of 8.35%. Assuming that all you do is make your minimum monthly payment then over the term of the mortgage your total payments will amount to $70,710. At the end of the term the principal balance outstanding will be $138,736.90

If you successfully negotiate 7.35% on a 5-year term (with a 25-year amortization) then your total payments over the term are $64,994.40. At the end of your term the total principal balance outstanding is $137,158.98.

This means that not only are you making $5,715.60 less in total payments over the term, but you also have $1,577.92 less principal balance outstanding at the end. Suddenly $4,500 cash back doesn’t seem so appealing?

I still think that today’s real estate prices and low mortgage rates represent a great opportunity for home ownership. If getting 3% cash back makes the difference between you being able to afford a home and renting then I say go for it. Still, no financial decision should be made without weighing out all the alternatives. Remember: when the offer seems too good to be true – it usually is.

It takes more than a realtor to buy a home


It takes more than a realtor to buy a home

By Genworth Financial Canada

Buying a home is a somewhat complicated transaction that involves a number of professionals who all perform different functions during the purchase process.

REALTOR® – A realtor will locate houses in your price range and in the areas where you want to live. The realtor will present your “offer to purchase” to the seller until an agreement is reached, usually for a commission. There are a number of realtors to choose from, so it’s advisable to shop around to find one you’re comfortable with. Talk to friends and family to get a referral.

Mortgage Broker – Some purchasers retain the services of a mortgage broker to assist them with arranging their mortgage financing. The mortgage broker should determine the best type of financing that suits your particular financial situation.

Lenders – Banks, credit unions and mortgage companies all lend money to homebuyers. Find out how much you can afford before starting to look. Lenders look at your income, debts, employment and credit histories and the value of the property you want to buy before giving you a mortgage. It pays to know how much you can afford before looking, so consider getting pre-approved. You don’t want to find your dream home and then discover you can’t buy it because it is too expensive.

Lawyer – Your lawyer (notary in Quebec) reviews the agreement of purchase and sale, ensures all closing documents, including title search and title insurance, have been completed properly, obtains signatures and records...............[read more]