If you know me well, you know that I get a kick out of alliterations (especially when it comes to titles and categories like “Mortgage Monday“) – how could I resist a triple-alliteration with “Mortgage Monday Myths” right? The world of mortgage is filled with mis-information, mis-conceptions and myths (more alliteration – woohoo! ;)), so every once in a while I’m going to address some of those myths here on the BarrieRealEstateTalk blog.
This week we’ll take a look at what most first-time home buyers probably consider the biggest road block to buying their first home: saving up for a down payment.
Mortgage Monday Myth #1: You need to have a down payment.
While a down payment of at least 5% will help you get the best rates and options for your mortgage, there are still some lenders that will provide “cash back” mortgages that essentially allow you to buy your first home with very little money saved. I don’t recommend a cash back mortgage to many first-time home buyers, but for those that want to get into the house market while rates are so low, sometimes a cash back mortgage is a great way for responsible people to get their foot in the door of home ownership.
That all being said, there are some caveats to keep in mind. Some cash back mortgages require you to actually have a 5% down payment saved, but the cash back can be used for closing costs and other initial expenses (new furniture, lawyer fees, taxes, etc), whereas others will permit you to use the cash back to actually cover the down payment. The cash back is “given” at the time of closing (when you actually move into the house, not when you sign the paperwork).
In addition (and this is the big one in my opinion), if you need to terminate the mortgage loan before the (usually 5-year) term has matured, the lender will “grab back” a percentage of the cash back you received up front. For example, if you took out a $250,000 mortgage and received a 5% cash back for your down payment ($12,500), but broke the mortgage 2 years early, you’d owe $5,000 back to the lender (on top of a bunch of other fees) for 40% (the 2 years you didn’t complete of the 5-year term) – yuck! It’s a little confusing, I know. But basically, if you do a cash back mortgage, you’ve got to be pretty sure you’re not going to break that mortgage before the term is up.
Of course, the most obvious downside to the cash back mortgage is that you’ll end up paying higher interest rates than you could get if you came up with the down payment on your own (you’re not just going to get the cash back for free, you know!). 😉 Usually the lender will charge “posted rates” (the rates openly advertised by the banks) for a cash back mortgage, versus the “best rate” you could get through a mortgage broker. Over the term of your mortgage, this could end up costing you thousands of dollars (but that has to be compared to the money/equity lost of renting instead of buying, of course).
In reality, you can still purchase a home with very little down payment, but you’ll end up paying more for not having one, and it could end up costing you even more down the road if you need to break the mortgage. Not everyone will qualify for a cash back mortgage, but don’t let not having a down payment stop you from trying to purchase your first home. The cash back mortgage may just be the solution you’re looking for.
