# First time home buyers looking into cashback mortgage



## MrBrown (Mar 22, 2011)

Hello all.

Looking for some honest feedback about 5.5% cash-back mortgages.

My wife and I are expecting our first child and are looking to buy our first home in Winnipeg. We currently rent, have no RRSP's, and have approx $7,000 in the bank. We have a combined annual income of ~ $120,000, and were told by the mortgage broker that we should be approved for a $350,000 mortgage.

I understand there's a price to pay to get the cash back mortgage, but I want to make sure I'm not missing anything.

The rates we were given are 3.9% for a standard mortgage, and 5.34% for the cash-back mortgage (with 5.5% cash back)

We are hoping to buy a home in the 220-250k range. If we take the cashback mortgage, we would have paid around 15000 more over the 5 years, but would have been given close to 14,000 up front. This sounds like a good deal in this market. If we went the other route and tried to save another 8000 for a down payment, that house we could buy now will probably be worth more anyway right?


Thanks
Mr Brown


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## andrewf (Mar 1, 2010)

How quickly can you save?

Your alternative would be to buy a more modest house, and finance your downpayment with a line of credit. If you can pay off the line of credit in a year or so, it's probably a better bet than taking the higher rate mortgage.

I'm assuming the money you get from a cash-back mortgage is really a loan (and thus added to the amount owing the bank).


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## sags (May 15, 2010)

The cash bank is a loan of sorts........you pay an increased interest rate over a conventional mortgage, rather than an increase in principal.

If you wish to pay off the mortgage early, you have to pay the remaining balance of the "cash back" in addition to the mortgage principal.

The cost to benefit ratio is about dead even. It isn't a gift.

But, for someone who needs the cash to buy furniture or appliances that will last a lifetime, it can be better than adding on additional debt from other sources.

I am not sure if they will let you use the "cash back" towards the down payment. If they do, then I think the "we are different in Canada, we aren't subprime lenders" goes out the window.

How do you get approved for a 350,000 mortgage with 7.000 down?


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## financialnoob (Feb 26, 2011)

Don't forget to factor in the difference in principle after 5 years as well. You'd have roughly $4-$6K more in principle outstanding based on a 25-year amortization.

But if you're using it against the mortgage principle, it might make sense. Should check if it is possible with that mortgage. And congrats on the baby.



sags said:


> I am not sure if they will let you use the "cash back" towards the down payment. If they do, then I think the "we are different in Canada, we aren't subprime lenders" goes out the window.


Some do. I haven't done a ton of research on mortgages yet (will have to soon), but TD allows for it subject to terms of the mortgage. So there may be limits to how much you can pay back in a year, though they do allow payments to be increased up to 100% so if not in one lump sum, could do it over the course of a year.

Which might not be a bad idea at all. I agree, I don't see how we are different as far as sub-prime lending goes. Maybe the terms of qualification are different, but it doesn't seem that way considering the OP.


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## the-royal-mail (Dec 11, 2009)

I think there are some fundamentals that are lacking in this whole plan. A $220K mortgage would require a down payment of $44K if you wanted to put 20% down and thus save CMHC fees. $7K is nowhere close to that. Plus you have closing costs and legal fees, moving expenses to pay as well. Do you have money for this?

And how much do you have for an emergency fund?

I would personally wait until you have more money saved. There will always be houses for sale.

Oh and yes, I've done the cash back thing. If you move or end the mortgage early you will have to pay back part of the cash back you received, depending on how far along you are in your term.


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## LondonHomes (Dec 29, 2010)

Something else to consider that has not be mentioned so far is the changing costs of homes in your market between the time you could purchase today with a cashback mortgage and when you could afford a down payment with out one.


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## kcowan (Jul 1, 2010)

Just keep in mind that the lender is doing this for their benefit and not yours. In rare cases, financial leverage can pay off. What is it about your situation that makes you think this is one of them?


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## ChrisR (Jul 13, 2009)

kcowan said:


> Just keep in mind that the lender is doing this for their benefit and not yours. In rare cases, financial leverage can pay off. What is it about your situation that makes you think this is one of them?


What makes MrBrown's situation one of these cases is that he lives in Winnipeg. And people in Winnipeg have realized that God isn't making any more land.

(Apparently however, Winnipegers have not yet realized that Manitoba has approximately the same population as Wyoming, "squeezed" into a land area twice the size of Germany.)


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## jamesbe (May 8, 2010)

I'm surprised no one mentioned or asked how with a very large income you do not have more savings or rrsps? Are you just starting out? Can you put together a plan to save? 

If you have been making that income for any length of time with so little savings I don't see how you can even buy a house, there must be other debt or something. The purchase price of a home is just the start they cost more than you can ever expect.


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## Cal (Jun 17, 2009)

jamesbe said:


> I'm surprised no one mentioned or asked how with a very large income you do not have more savings or rrsps? Are you just starting out? Can you put together a plan to save?
> 
> If you have been making that income for any length of time with so little savings I don't see how you can even buy a house, there must be other debt or something. The purchase price of a home is just the start they cost more than you can ever expect.


I had wondered the same...perhaps they had been paying off school debt...

And yes don't houses cost alot...it could help if they are buying a used home, as it would probably come with window coverings and light fixtures, which are surprisingly expensive.

Personally, I would rather have more skin in the game, and save up more of a downpayment.


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## kubatron (Jan 17, 2011)

financialnoob said:


> Some do. I haven't done a ton of research on mortgages yet (will have to soon), but TD allows for it subject to terms of the mortgage. So there may be limits to how much you can pay back in a year, though they do allow payments to be increased up to 100% so if not in one lump sum, could do it over the course of a year.


TD and CIBC Firstline do not allow the cash-back portion to be used for down payment. Scotiabank and Laurentian Bank do. If you already have that amount in your account ($7000) and you're looking for a $250,000 house (max), you're so darn close. Why not instead of taking a 5.5% cash - back, why not take a 2-3% cash - back instead?

I would, however, advise you to beg/borrow or steal the 5% down payment. At $250K, you're $12,5000 and $5000 to close away, so really about $10K. If you're making that kind of money, save the down payment, don't worry about the market going up. Or, borrow from family/friends/get a gift. It's a house purchase, not a car.

5.44% vs 2.25% is an astronomical difference in terms of interest paid and payments. 

I never advise clients to take cash-back unless last last resort.


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## kubatron (Jan 17, 2011)

the-royal-mail said:


> I think there are some fundamentals that are lacking in this whole plan. A $220K mortgage would require a down payment of $44K if you wanted to put 20% down and thus save CMHC fees. $7K is nowhere close to that. Plus you have closing costs and legal fees, moving expenses to pay as well. Do you have money for this?
> 
> And how much do you have for an emergency fund?
> 
> ...


20%? Guy is making $120K and can barely save $7K and you want them to save 20%?

CMHC should never be a hinderance to buying a house. It's priced into the mortgage and amortized over the term. I always encourage people to put down less than more unless they are flush with cash. The difference in payment and marginal cmhc fees aren't worth it to go all-in.


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## kubatron (Jan 17, 2011)

If you're looking at $250,000 and you have $7000, then you need a 4% cash back which will cost you less in terms of rate (still not nearly preferable to having the 5% down from your "own" resources)


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## GoldStone (Mar 6, 2011)

kubatron said:


> I always encourage people to put down less than more


Can you disclose how that affects your compensation?


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## Shayne (Apr 3, 2009)

Give this a read:

http://www.debtfreeby43.com/2009/08/10/no-down-payment-mortgages-are-they-worth-the-money/

The equivelent rate with 5.5% cash back at 5.34% is 3.95% Not too bad really. 

At the end of the day the overall difference is only $72.32 a month.

If you believe that interest rates or home prices are going up this is almost a no lose deal.


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## Shayne (Apr 3, 2009)

GoldStone said:


> Can you disclose how that affects your compensation?


I will disclose this for you.

Brokers are paid on the total mortgaged amount. 

ie: I get paid 3 times as much for a $300,000 mortgage as I would for a $100,000.


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## Shayne (Apr 3, 2009)

kubatron said:


> 20%? Guy is making $120K and can barely save $7K and you want them to save 20%?
> 
> CMHC should never be a hinderance to buying a house. It's priced into the mortgage and amortized over the term. I always encourage people to put down less than more unless they are flush with cash. The difference in payment and marginal cmhc fees aren't worth it to go all-in.


Time to do all the math on putting less down and presenting that to your clients. At the end of the day it is our job to save our clients money.


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## financialnoob (Feb 26, 2011)

kubatron said:


> TD and CIBC Firstline do not allow the cash-back portion to be used for down payment. Scotiabank and Laurentian Bank do. If you already have that amount in your account ($7000) and you're looking for a $250,000 house (max), you're so darn close. Why not instead of taking a 5.5% cash - back, why not take a 2-3% cash - back instead?


As for TD, it does say you can use it to pay down the mortgage, subject to terms of the mortgage. But you are correct that it cannot be used as part of the down-payment. 

As for Scotiabank and Laurentian, that's surprising. Do you know how is that not considered a sub-prime loan out of curiosity?


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## kubatron (Jan 17, 2011)

It's one thing I've commented on my blog about - how in God's name are we still allowing "0-down" mortgages masquaraded as 5% cash-back.

Yet, firstline cibc and td are such hypocrites. Who would EVER consider paying 5.4% only to get 5% cash-back if they could be paying 2.25% for example?

TD says this: put down 5% from your own funds or gifted, and we'll allow 5% cash-back to you. Well obviously these people are 'borrowing' the gift and paying it back.

Why BNS and LBC are allowed to do it, I do not know, but I think it's total BS.


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## LondonHomes (Dec 29, 2010)

kubatron said:


> It's one thing I've commented on my blog about - how in God's name are we still allowing "0-down" mortgages masquaraded as 5% cash-back.
> 
> Yet, firstline cibc and td are such hypocrites. Who would EVER consider paying 5.4% only to get 5% cash-back if they could be paying 2.25% for example?
> 
> ...


They get to do this because they are following the letter of the law. The law is clearly flawed. But the government gets to say that they've stop zero down mortgages and that's all they care about.


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## HaroldCrump (Jun 10, 2009)

It is stuff like this that is creating the RE bubble in Canada.
Low interest rates, 0% down, cash back, 40 and 35 year amortizations (thankfully now gone).


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## the-royal-mail (Dec 11, 2009)

100% agreed HaroldCrump - and this is causing all of us to give out record percentages of our income over to mortgage payments, property tax and RE fees. No wonder prices are so high. I think banks need to tighten up the rules a tiny bit.


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## kubatron (Jan 17, 2011)

GoldStone said:


> Can you disclose how that affects your compensation?


Yes.
A $250,000 mortgage will pay me $2000 and a $200,000 mortgage will pay me $1600. After doing $400M in volume over 8 years, that $400 *isn't* worth the extra $400. Clearly I've been doing something right though by servicing clients the right way. Nice attempt to take a jab at my livelihood though.


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## kubatron (Jan 17, 2011)

Shayne said:


> I will disclose this for you.
> 
> Brokers are paid on the total mortgaged amount.
> 
> ie: I get paid 3 times as much for a $300,000 mortgage as I would for a $100,000.


Wow, you're smart except 5% isn't the equivalent of $200,000.


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## kubatron (Jan 17, 2011)

HaroldCrump said:


> It is stuff like this that is creating the RE bubble in Canada.
> Low interest rates, 0% down, cash back, 40 and 35 year amortizations (thankfully now gone).


The only way I disagree with your comment is this.

A variable-rate customer with 5% down must qualify at 5.44%, but pays 2.25% 

A "zero down" customer qualifies and pays 5.44%. Therefore this is already at the "peak" of rates (i.e. 1.5% higher than the best 5 yr fixed and 3.2% higher than variable) so I wouldn't say these people are the ones creating or feeding the bubble, because they're already paying the much much higher rate (and for the most part, being able to afford to)


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## kubatron (Jan 17, 2011)

Let me explain what I meant by encouraging people to put down less than more for all the ignoramuses out there.

If someone comes to me with 7% down and zero savings, vs 5% down and 2% left over, since there is no difference in the cmhc premium they will pay, i would show them the math (difference in payments vs difference in savings and cmhc paid) and it makes sense to have "something left over". 

especially first-time buyers.

so those who think I encourage people to "borrow $300,000 not $100,000" are clearly completely misinformed and have no concept of what they are talking about.

OF COURSE (duhhhhhhhhhhhhhhhhhh) if someone has an extra $200K lying around, of COURSE they could/should put it down. Usually those people are so financially savvy they are calling their own shots, however.


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## Shayne (Apr 3, 2009)

kubatron said:


> Wow, you're smart except 5% isn't the equivalent of $200,000.


Was that a jab at me?

I am very impressed with your numbers BTW. Averaging $400,000 in income a year is awesome!!


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## kubatron (Jan 17, 2011)

yes of course it was a jab at you. your analysis of the situation is totally incorrect and furthermore I clearly quoted your comment so therefore was making reference to it. who else could it be a jab at?

again, your example of a delta of $200,000 is completely and utterly nonsensical.


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## Shayne (Apr 3, 2009)

kubatron said:


> yes of course it was a jab at you. your analysis of the situation is totally incorrect and furthermore I clearly quoted your comment so therefore was making reference to it. who else could it be a jab at?
> 
> again, your example of a delta of $200,000 is completely and utterly nonsensical.


I was meerly pointing out that we are paid based on the total mortgaged amount which is accurate. I didn't make mention of you encouraging people to take out a greater mortgage. I didn't analyze anything. Nothing to analyze, larger mortgage, larger commission.

Why are you getting all bent out of shape? I was simply responding to a question, not even your question. 

I think you will spice things up here and on RFD. Welcome. 

Signed:

Ignorammus.


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## Shayne (Apr 3, 2009)

kubatron said:


> Let me explain what I meant by encouraging people to put down less than more for all the ignoramuses out there.
> 
> If someone comes to me with 7% down and zero savings, vs 5% down and 2% left over, since there is no difference in the cmhc premium they will pay, i would show them the math (difference in payments vs difference in savings and cmhc paid) and it makes sense to have "something left over".
> 
> ...


Oh, and there is a difference in the CMHC premium. Very small, but a difference because the premium is also based on the total mortgaged amount and if they are putting less down, their mortgage will be higher.

I thought you would like that.


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## Shayne (Apr 3, 2009)

kubatron said:


> Yes.
> A $250,000 mortgage will pay me $2000 and a $200,000 mortgage will pay me $1600. After doing $400M in volume over 8 years, that $400 *isn't* worth the extra $400. Clearly I've been doing something right though by servicing clients the right way. Nice attempt to take a jab at my livelihood though.


The guy just asked a question. What jab?

Perhaps you are more intuitive than I........


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## dare23 (Feb 24, 2011)

Back on topic Mr.Brown you should beef up the savings a little. We need to know why with 120K income your savings are rather small. Are you aggressively paying down debt of some sort?


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## Berubeland (Sep 6, 2009)

In my opinion, you don't need a house right now. It might be a good idea to work on lifestyle/consumption issues. Saving for the down payment for your your house is a good motivator for developing savings habits that will hopefully carry you through into your retirement years. 

I don't want to be one of those seniors who ends up eating dog food from a can because that's all I can afford... do you?


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## MrBrown (Mar 22, 2011)

Yes, we have been paying off debt like crazy in the past two years. We were able to eliminate about 20,000 in the past two years.


and we ended up getting some gifted to us by our parents, so we will have $13,000 for a down payment and still plenty for the closing costs. Still personally scary getting into this with not much in savings, but I think we'll make it work. My wife is going on maternity leave shortly which is going to hurt somewhat (she's a nurse) but I make more than she does (67k) so I think we'll be alright. I wish I was better with money lol. But thank you to everybody who took the time to respond, it was more helpful than you probably think!


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## Plugging Along (Jan 3, 2011)

MrBrown said:


> Yes, we have been paying off debt like crazy in the past two years. We were able to eliminate about 20,000 in the past two years.
> 
> 
> and we ended up getting some gifted to us by our parents, so we will have $13,000 for a down payment and still plenty for the closing costs. Still personally scary getting into this with not much in savings, but *I think we'll make it work.* My wife is going on maternity leave shortly which is going to hurt somewhat (she's a nurse) but I make more than she does (67k) so I think we'll be alright. *I wish I was better with money lol.* But thank you to everybody who took the time to respond, it was more helpful than you probably think!


What you're considering is not just personally scary, it is putting your family and future family in jeopardy. The fact that you 'think we'll make it work' without a plan, pretty much is covered by 'Those who don't plan, plan to fail'. 

Just because you make more than your wife, does not mean you will be okay. Based on your numbers, your wife normally will make about $53K will only get about $24K before tax on mat leave. So think about if you would be able to afford the mortgage on a $77K (before tax) income. You may say to yourself that it's only a year, then think about adding a new baby, and they cost money for just the neccessities, then add in the other things you'll want to buy, but can't because you can't afford to. Then add the possibility that your wife may not want to return to work, but will have to because of the mortgage that you have. If she does, there is childcare costs, so she won't get the full amount like now. Add maybe another baby in your future. My question is what is your plan for these things? You don't need to have all the answers now, however, if you get yourself over extended on a mortgage, you will have much fewer options available to you. The things I mentioned are pretty normal things about having kids, it doesn't even involve emergencies or job lost or anything out of the ordinary. 

The other part of your post of wishing you were better with your money is probably the most concerning of all. I wish for a billion dollars without any work, and a perfect life without having to doing anything. That's not going to happen either. You have an opportunity to be better with money now by making decisions that will impact you, your wife, and your child for a lifetime.


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## Four Pillars (Apr 5, 2009)

Plugging Along said:


> What you're considering is not just personally scary, it is putting your family and future family in jeopardy. The fact that you 'think we'll make it work' without a plan, pretty much is covered by 'Those who don't plan, plan to fail'.
> 
> Just because you make more than your wife, does not mean you will be okay. Based on your numbers, your wife normally will make about $53K will only get about $24K before tax on mat leave. So think about if you would be able to afford the mortgage on a $77K (before tax) income. You may say to yourself that it's only a year, then think about adding a new baby, and they cost money for just the neccessities, then add in the other things you'll want to buy, but can't because you can't afford to. Then add the possibility that your wife may not want to return to work, but will have to because of the mortgage that you have. If she does, there is childcare costs, so she won't get the full amount like now. Add maybe another baby in your future. My question is what is your plan for these things? You don't need to have all the answers now, however, if you get yourself over extended on a mortgage, you will have much fewer options available to you. The things I mentioned are pretty normal things about having kids, it doesn't even involve emergencies or job lost or anything out of the ordinary.
> 
> The other part of your post of wishing you were better with your money is probably the most concerning of all. I wish for a billion dollars without any work, and a perfect life without having to doing anything. That's not going to happen either. You have an opportunity to be better with money now by making decisions that will impact you, your wife, and your child for a lifetime.


+1


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## NotMe (Jan 10, 2011)

+ 2

I don't recall where you were looking, but in Toronto daycare for a 1 year old is $1800/month. It is killer and now that my son is 3, it's still $1275 each and every month.

When my wife and I bought our house we made the exact same amount of money as you two. I sold my loft and put down $50,000 and still had an extra $30,000 to keep.. or so I thought. It was far more expensive than I expected ($1K/month more than estimated) with my wife on mat leave and the house required what I now realize is 'normal' repairs - new roof, new electrical, new appliances in a few cases. That $30K was burned through in a year. 

I get the desire for a house with a baby - I do - but your baby won't know the difference between a rented house and a bought house and renting gives you more options. At least consider it before you mortgage your future for your present.


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## Bupp (Nov 13, 2009)

Buy the property with an open-variable mortgage at any random bank and then take advantage of the CIBC quick close mortgage offer of:

5-year fixed rate 4.2% + 2% cash back. 

Works out to a net-rate of less than 3.7%.


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## marina628 (Dec 14, 2010)

The only time 5% cash back makes sense is if you are an investor like me that has no choice but take a locked in rate and the mortgage is VERY LOW .I did one in 2010 and took the cash back mortgage at 4.89%.I immediately double my payment and one day after house closed I took cash back and paid down on mortgage.About 45 days later i completed the 15% down.I closed in September and in Janaury i could then put another 15% down.I did not double check numbers but by doing all these my effective rate is supposedly 3.45% .


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## Bupp (Nov 13, 2009)

marina628 said:


> The only time 5% cash back makes sense is if you are an investor like me that has no choice but take a locked in rate and the mortgage is VERY LOW .I did one in 2010 and took the cash back mortgage at 4.89%.I immediately double my payment and one day after house closed I took cash back and paid down on mortgage.About 45 days later i completed the 15% down.I closed in September and in Janaury i could then put another 15% down.I did not double check numbers but by doing all these my effective rate is supposedly 3.45% .


Not true.

You need to take the rate offered + cashback offered and plug it into an amortization calculator.

Usually you will find the offers to be equivalent, sometimes one offer will be better than another.

IE a mortgage of 4.2% with 2% cashback is better than 3.9% with no cashback.


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## Shayne (Apr 3, 2009)

Bupp said:


> Not true.
> 
> You need to take the rate offered + cashback offered and plug it into an amortization calculator.
> 
> ...


You have to look at the equivalent rate ie 4.2% with 2% cash back with a 25 year amortization is equivalent to 3.715%.


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