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In speaking with a mortgage adviser recently, I found out about cash back mortgages. I was wondering if someone here knows about this and could tell me if they are a good idea?

To give you some background, I am looking to buy a house in 1/2 years time and the approximate cost of the house is going to be close to $500,000. I know for sure there is no way I will be able to save 5% or 10% ($25k or $50k) for the down payment (I am a first time home buyer).

I could take a loan from my in-laws, but I would prefer not to and although I am saving in an RRSP and TFSA and others, I will still fall short.

Edit: My math seems incorrect; I should be able to pay for at least 5% down, but I am still curious about the cash-back mortgage and when it makes sense to use one.

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    If you won't be able to save even 5% for the downpayment, how will you afford the mortgage payments? – JoeTaxpayer Nov 27 '13 at 19:08
  • surprisingly that i can afford. I estimate I the mortgage payment would be close to 1300 and that I can do. – Abhishek Asthana Nov 27 '13 at 19:30
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    $500K/360 = $1389. A 3.5% amortizing loan is $2245/mo (30 year loan). Are you looking at a negative amortization loan? – JoeTaxpayer Nov 27 '13 at 19:38
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    Negative amortization is when the payment doesn't even cover interest and your balance, the amount owed, gets larger each month. I'm not judging. It's just important (for you)to know the exact details of what you are getting in to. – JoeTaxpayer Nov 27 '13 at 19:55
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    Paying a mortgage is not only about paying principle but it also involves interest + Property Taxes + PMI + Closing Cost + HOA (if applicable). Before asking what is "cash back mortgage" you should ask "how much your monthly payment will be based on interest rate and other factors" – Asdfg Nov 27 '13 at 22:20
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The term "cash back mortgage" doesn't appear to be have a single meaning. It can mean cash back at a closing, extra cash pulled out when refinancing, or an annual rebate of some sort.

If you provide the requested details, of the terms of a loan near $500K that sports a $1300/mo payment, you're likely to get some excellent advice.

The article I linked suggests these are just gimmicks and I agree. I'd focus on a normal product.

Edit - in response to OP's "over the phone" comment -

When asking about a mortgage you need to know (and we need this to answer) -

  • Principal - the dollar amount lent to you.
  • Interest rate - the annual percent charged on the balance
  • The term of the loan - In the US, 30 year fixed is a popular choice. In Canada, I understand loans run 5 years, and are then renegotiated. Very simple - After those 5 years, what is the balance on the loan?

Now, that's the mortgage itself, Asdfg above comments to remember there are other expenses, the property tax, homeowner association, if any, PMI (or any mortgage insurance, common for low downpayment loans) and the one time closing costs. (If I missed something, I hope someone will just edit into this list)

  • Unfortunately those number I got over the phone so I have nothing to back up those numbers. – Abhishek Asthana Nov 28 '13 at 12:23

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