Personal Finance

Effective Mortgage Rate minus Cashback

  • Last Updated:
  • Aug 20th, 2021 10:16 am
[OP]
Member
Jul 31, 2018
397 posts
196 upvotes

Effective Mortgage Rate minus Cashback

Many mortgage lenders nowadays offer cashback instead of lowering the mortgage interest rate. I want to calculate the effective mortgage rate after deducting the cashback amount.

Here is an example I want to calculate the effective mortgage rate:

Purchas Price = $500k
Down Payment = $100k (20%)
Interest Rate = 1.50% 5 year variable 25 Yr Amortization
Monthly payment = $1599
Cashback = $950

Total Principal and Interest = 1599x(5x12) = 95,940
Minus Cashback = 95,940 - 950 = 94,990


If you pull out a mortgage calculator, this is equivalent to having mortgage interest 1.42% without cashback
Total Principal and Interest = 95,038


In summary a 1.50% with $950 cashback is almost equivalent to having 1.42% with no cashback.

Let me know if I did the math correct, or I am missing anything
full time realtor + medical professional
3 replies
[OP]
Member
Jul 31, 2018
397 posts
196 upvotes
bump
full time realtor + medical professional
Sr. Member
Feb 9, 2018
597 posts
495 upvotes
That doesn't seem correct. Its little complex than that. Here is one calculator from ratespy.

https://www.ratespy.com/mortgage-rate-c ... calculator

According to this if you input mortgage rate 1 as 1.5 and rate 2 as 1.446 (trial and error), your cashback is $950. They calculate nominal rate difference and true cost difference on which cashback should be based on. They have an article on it explaining that:

https://www.ratespy.com/cashback-rates-04105297
Sr. Member
Jan 19, 2003
966 posts
371 upvotes
maxineli wrote: What should be entered for "Compounding periods per year", if it is 5 year variable for 25 year paid monthly?
From what I understand, compounding frequency for variable rate mortgages vary by lender. Some have fixed compounding periods, some compound as frequently as your payment schedule.

This differs from fixed-rate mortgages, which always compound semi-annually.

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