It’s the last refuge of those who don’t have money, but still want to own a home.
The deal is simple. The bank gives you cash up front to use however you want, except as the down payment.
The price of the upfront cash is a much higher interest rate — usually the posted rate, which may be almost two percentage points higher than you might get negotiating.
It’s a costly move when considered over a five-year mortgage term. My bank says you can get $20,000 up front on a $400,000 mortgage, based on a 5% cash-back mortgage. Based on monthly payments at the current posted rate of 4.99%, that mortgage will cost you $93,422.91 in interest over five years. The same mortgage will cost you $55,288,48 in interest at 2.99% — the going rate in the discount market.
“Incentive and rebate payments (ie. cash back) should not be considered part of the down payment,” said the regulator. In cases in which people don’t use their own equity and opt for non-traditional sources as a down payment, the regulator seems to want federally regulated mortgage insurers to consider that risky and charge a larger premium.