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Recasting: Mortgage Hack Your Way to Increase Your Cash Flow
When it comes to lowering mortgage payments and increasing your cash flow on an existing investment property, chances are you’re probably thinking about refinancing your loan and getting yourself into a brand new 30 year fixed interest rate mortgage.
It’s a decent plan. I’ve done it myself before and don’t have a lot of complaints.
Refinancing can definitely be useful in lowering your payments and increasing cash flow, but it also means you might not have your property paid off free and clear for another 30 years since most refinanced loans restart the payment clock all over again…not to mention the costly fees it takes once you commit fully to going through the refinancing process.
As you probably know, those fees add up quickly which means it will take even longer for you to recover the entire expenditure and make refinancing worth all the cost and trouble you’ll go through to get it. What’s worse is that some people are not able to qualify for a conventional mortgage after losing a job during a severe economic downturn that ultimately removes refinancing as an option to increase their passive income right when they need it most.
But what if there was a way to increase your cash flow over and over again incrementally over time as often as you like without restarting the clock on your mortgage payments or qualifying for a new conventional loan, and something that wouldn’t squeeze your finances with all the usual obnoxious refinancing fees?
Fortunately that ability is something you have always had available to you if you hold a conventional mortgage whether you have a job or not, but chances are you probably don’t even know the first thing about it or much less have any awareness of its existence.
Personally, I found most real estate investors I talk to don't know anything about this idea, never heard of it, and are often shocked when I tell them what I have done myself to instantly increase my own cash flow and move closer and closer to getting out of the rat race faster and faster one small step at a time.
Again, there is no cost to you, I certainly get nothing out of this myself should you pursue this option, and neither do the banks who hold your mortgage which is probably why you don’t know anything about it. At the end of the day, you’re pretty much the only one in this whole transaction who stands to gain anything of true lasting value.
Since banks make their money on refinancing, that’s what they like to push out to their customers and generally don’t talk about another lesser-known free option that’s also available. In many cases the free option might be the better decision when it comes to improving your cash flow because of how quick and easy it is and because it’s far less complicated than going through a refinance.
Strangely, I’ve also noticed that most real estate investing books never mention this technique either, and in rare case when they do touch upon it, they almost always gloss over the benefits such as paying off your mortgage faster than you thought possible at no cost. For context, I have read well over 200 books on real estate investing, and from those I've gone through, maybe two of them broached this subject…maybe. But it could have been only one now that I think about it.
It’s called RECASTING.
Recasting is a process I have used to quickly increase my cash flow several times. The more I used recasting, the more my cash flow increased. The more my cash flow increased, the more I was able to save. The more I was able to save, the more I was able to pay down my mortgage, and on and on it went…
But what is recasting and how does it work?
Let’s say you end up with a chunk of money for one reason or another. Maybe you saved it or maybe you got an unexpected windfall that somehow showed up from a distant relative you hardly knew existed. However you got the money, let’s say you’re now staring at an extra $5,000 in your bank account you’re not altogether sure what to do with.
In this example, and using very rough numbers to help illustrate the idea, let’s assume you already have enough money in reserves set aside for vacancy, repairs, and capital expenditures, and don’t have any pressing bills or obligations you must take care of in the near future. The $5,000 is available to do whatever you want with it. You have one property with $50,000 left on the principal of your mortgage, and a monthly payment of $500. Of that $500 payment, let’s say $300 is interest and $100 is principal. The rest goes to cover taxes and insurance. I know these numbers are hardly scientific or accurate, but stick with me for the sake of the example. The exact numbers really don’t matter here, and most likely yours will be wildly different anyway.
Once you’ve made the decision to recast your loan instead of refinancing, the first thing you’ll do is make an additional $5,000 principal only payment to your loan balance. Make sure you verify directly with the bank that the whole amount has been made to the principal portion of your loan which will bring your overall balance down to $45,000.
Okay, so far so good.
The problem at this point is that you are still on the same amortization schedule as you were before you made the $5,000 payment, so your monthly mortgage bill will not change and will remain at the same amount month after month if you end up doing nothing more.
That’s why you want to pick up the phone, call the bank that services your loan, and tell them you paid a portion of your mortgage principal off and would like to now recast your loan. They may ask you to submit a formal request in writing in which case you can either fax or email the request in by referencing the loan number and asking the bank to kindly initiate a recast on your mortgage.
In a couple of days, you will receive a Fedex delivery on your doorstep with approximately three pages of documents in total as well as a pre-paid return envelope. The first document will be a letter from your loan servicing officer acknowledging that you made a formal request to recast your loan on such-and-such a date.
A second document will ask for your notarized signature. This is the only time you will potentially pay some money out of your own pocket for the recasting process. If you live in California as I do, it will cost you as much as $15 for the one single notarization that you will need to obtain. If travel is involved for the notary, it might cost you a little more, maybe as much as $100 depending on who you hire for the notarization service and how far they live from your location. If you go to a business that offers notarizations, you can expect to pay only $15 for the service at the time of this writing.
On the other hand, if you happen to have someone at work who is a notary, they potentially can notarize your document entirely for free if you ask them really nicely. I always give notaries the maximum $15 signature fee whether they charge me or not since I had been a California State notary myself for 12 years and know the costs and time involved in earning that notary commission. For California, there is quite a lot of effort involved. I think with everything I paid out, it came in around $700 to secure my four-year notary commission. That’s a lot of future signatures to make up for that much money and why eventually I resigned my commission. It was far too costly and something I had to repeat and pay $700 every four years as well as retake the test, so no thanks, California.
The third document tells you what your new payment will be once the recast has finally gone through and after the recalculation has been made.
Once you send the single-page notarized document (page 2) back to the bank in the pre-paid return envelope they included, in just a few days you will notice the amortization table has been adjusted since the overall principal amount that will be paid down every month has now dropped by $5,000. The interest, taxes, and insurance payments all remain the same. Those portions of your loan only change with a refinance, but not with a recast. You will notice that the debt payoff date has not moved either, and that your original loan is still firmly in place. Everything stays exactly the same as it was except for the principal amount that you must pay down each month. That portion of the loan has been reduced.
Since the overall mortgage payment in total will now be lower, that means your cash flow has just gone up. Assuming the rental payments you collect from your tenants remain the same, the dollar amount taken from those rentals to pay your mortgage has effectively now decreased, so you end up keeping more of it in your own pocket.
Not bad. Granted, it’s not a large increase in this example, but it’s always nice to see your cash flow going up in a positive direction little by little over time. Eventually it adds up substantially.
Okay, now let’s say a month has passed since the first successful recast, you made your lower mortgage payment, and your total cash flow has gone up slightly. You look in your mailbox one day, and what do you know…another unexpected check for $5,000 has shown up that once again you don’t know what to do with.
We should all be as lucky as you are. Obviously you have excellent financial luck and the universe smiles and looks favorably upon you.
So you decide to pay down even more principal on your loan and repeat the whole recasting thing over again exactly as you did the first time.
You make your $5,000 payment to principal only, call the loan servicer to tell them you would like to recast your loan, send in the written request, wait for the three pages of documents to show up on your doorstep, get the one document notarized (page 2), send it back to the loan processor, then wait for the payment recalculation once again. The monthly mortgage payment will be even lower this time around, and coupled with last month’s recast, your cash flow will be higher still.
You get to keep just a little more money in your pocket each month, and at the most, this second recast might have possibly cost you an additional $15 in a notarization fee all in—or nothing if your friend at work does it for free. That’s it. No bank charges. No points to haggle over and pay down. No vague miscellaneous filing fees.
Nada.
And you can do this as much as you want for any amount you pay the principle down. There is no limit to the number of recasts you request. But make sure you notice how much principal is generally paid off every month during each mortgage payment you make since you will notice the principal and interest amounts change over time. If you get to a point where no principal is getting paid off for the time being, then a recast will not improve your cash flow, but it will still continue to help pay off your loan quicker since you’ve decreased the financial distance you must travel until you reach zero and retire the loan completely. In this case, you started with a $50,000 loan and in two months paid off a total of $10,000, increased your cashflow, and now you have only $40,000 left in principal until you’ve paid off your house free and clear.
Sometimes I come across people who for years had made several extra payments already to the principal amount on their loan and in some cases lowered the amount they owe by tens of thousands of dollars, but otherwise who do not know the next step they can take by calling up the bank and requesting a recast. In some cases the monthly mortgage payment can drop precipitously depending on how much they’ve already paid off. While they were trying to think ahead, do the right thing and get their loan paid down faster than scheduled, they often didn’t realize they also had another option to recast the loan.
If you have already been making extra payments over the years yourself and reduced your principal, it might be worth reading no further, calling your bank, and asking about recasting your loan just to see what happens. Your monthly mortgage payment amount could go down, and all it would take is a single phone call to find out.
Recasting is a tool I wish I had known about when I first got into real estate investing. It took a long time before I understood this whole process because the bank was not forthcoming about recasting as an option. It was almost as if they answered only binary “yes” and “no” questions until somehow I navigated my way to understanding the process. I literally had to call the mortgage servicer over and over again before I put the whole idea together in my head and knew it would increase my cash flow without throwing away thousands of dollars in refinancing fees and starting my payment schedule all over again which I did not want to do.
After I paid down some of the principal for the first time and initiated the recast, I was completely hooked and did it as often as I could until I was hardly paying any principal amount each month at all. I liked the increased cash flow I saw coming in every month and didn’t mind that less and less was going towards principal pay down each month since I knew I would continue to pay off more of it anyway. With the extra cash I was accumulating, it helped me pay down the principal amount on a far more accelerated schedule than passively waiting out the entire 30 year period the loan originally had been written for.
Occasionally when I found that money was a little tighter as I made monthly mortgage payments, I would add in an extra $200 or $400 from my extra cash flow for principal only, and after I finally had paid down an extra $5,000 in principal total, however long it took, I would send in my request to the bank to recast the loan and quickly saw my cash flow go up again.
One thing I know for sure is that once I have mortgages to service with future properties I end up buying, I definitely will be using the recasting process as often as I can to lower my payments and increase my cash flow without refinancing. When looking for a loan product, I know I will calculate this strategy into my decision making, and whenever I find myself staring at an extra amount of cash and trying to figure out what to do with it, assuming the universe is benevolent that day, no matter how big or small it is, I know I can always pay down a portion of my loan and almost immediately benefit from the increased cash flow with no cost involved except for possibly a small and totally insignificant notarization fee.
I truly hope you are able to use this idea successfully yourself as well, share it with others, and that you appreciate all the positive benefits it brings that I have seen firsthand with my own recasting activities.
I wish you nothing but continued prosperity and an accumulation of many incremental rounds of small but significant monthly cash flow increases step by step to a zero balance, and even all the way to the rat race exit door.
That's awesome. I hope you're able to use it to boost up your monthly cash flow numbers to make your retirement even more comfortable and that your example also helps others achieve the same as well.
Enjoy!
Scott
@Scott Benton why on earth would you give the bank money early just to increase your cash flow?? It’s a phantom increase, you’re the one footing the bill with that upfront lump sum. This is so counter to properly leveraging I can’t even begin to explain. No offense...but you’re paying down a 3% mortgage with money that could earn 7-10% elsewhere for the sake of phantom cash flow. 🤷🏼♂️
@Scott Benton
Ok so, I’m not a math wiz, but...
Let’s take your $50,000 loan/3.75%/30 year amortization. (No taxes/ins for simplicity)
50k/3.75%/30 years - $231/month
45k at same terms- $208/month
Difference is $23/month or 217 months to recoup your $5k pay down.
It’s not worth it, even if it’s free. I’d rather have the $5k in my acct.
@Whit B. I agree with what you’re saying, but I do think there’s a benefit to this specifically for people with complicated financial pictures trying to refinance or get new financing.
If someone has a bunch of cash, but lacks in cash flow (at least by conforming loan standards), this would be a good way to create cash flow to qualify for a loan. Other than that, or for individuals who would have a hard time not spending a chunk of change on something stupid, I’m not seeing much of a use for this.
Good to know it exists though.
This clearly does not sound like an idea you should use, so I would advise that you don't consider it any further. I'm not giving the bank anything. The equity in the property I own goes up if I make extra payments assuming the value I can sell the property for remains the same (I don't plan to sell), so I still have the money in another form other than cash. That equity belongs to me, not the bank, so I've lost absolutely nothing. I'm converting my money into more equity to increase my monthly cash flow that I pay no taxes on (passive income vs. portfolio income which it sounds like you prefer) for the remainder of the time I own the property and have it rented out. That's quite a long time and certainly valuable to me. If my debt pay down of $5,000 increases my cashflow (let's say) to a conservative $50 a month. $50 x 12 = $600. $600 is a 12% cash on cash return on the $5,000 per annum if you want to look at it that way which I frankly don't pay attention to and don't care about myself. However, this is a true 12% since I don't pay taxes on it because of the classification of the income, and I get to spend the whole amount if I like. With portfolio income, you are paying approximately 24% (or more), or one quarter (or more) of the gains, in taxes which is a much weaker form of money overall. Passive income from rentals is taxed at 0% with all the tax incentives you receive from owning rentals because the government doesn't want to build housing, so they give you a break to do it. I would rather pay nothing in taxes myself all day long over paying one quarter (or more) of my gains in taxes for holding paper assets as you are suggesting. Assuming your higher 10% rate figure on $5,000 per annum, that means you'll get $500 in gains. If you pay 24% in taxes, that leaves you with $380 of spending power ($120 goes out to the IRS). $380 is a 7.6% gain on $5,000.
By the way, where are you getting 7–10% gains from in the market? I'm sure the pensions would certainly like to do the same since they are unable to reach those numbers themselves and rapidly moving into more and more toxic assets to try and make up the difference since they are dramatically underfunded, poorly managed, riddled with corruption, pay an enormous amount of money to Wall Street in the form of unreasonable and usury level management fees, and soon will be our next worldwide crisis that unfolds.
If I don't care about leverage percentages or getting lost in my brokerage account by dumping money into some index fund and forgetting about it, and just want to increase my cash flow on my rental and not go through a refinance which means I have to reset the payment clock back to the next 30 years, then a recast is a pretty good option in my book, but it's not for everyone, I definitely agree.
Perhaps our priorities are completely different which is perfectly fine and I more than appreciate.
@Scott Benton I see this being useful for someone who needs to create more cash flow in order to qualify for loans. Other than that it makes no sense. It’s an interest free annuity.
I definitely agree with what you’re saying. Thanks for sharing
Then obviously don't use it and don't recommend it. I will continue to use it and will continue to recommend it. It's been great for cash flow which is what my priority is. Not leverage or qualifying for a loan, and not the percentage of return I'm getting. Just the cash flow.
@Scott Benton Thanks for the info. I had never heard the term recasting!
@Scott Benton
Great post! I'm certainly looking into this more.
I see a few people challenging this idea, saying that it's not a great substitute or competitor for refinancing. However, if you're paying the principal down, then doesn't it allow you to get more from a cash out refinance or even do it sooner? If it does, then doing this during times of high interest rates would seem like a great strategy to set yourself up for getting a cash out refinance once interest rates drop, assuming you don't care about the length of the term.
This could prove useful in my particular situation because I decided to get an FHA loan with a 5% down payment to house hack a duplex. Most banks want to only give you a loan for 80% of the property's value. I'm not there yet, but it seems like this strategy could get me there sooner.
What do you think?
Thanks again,
Kyle Hern
@Kyle Hern
You nailed it. People “love” leverage and don’t even rationalize what others post. If you have some extra cash sitting in the bank, you cant always buy another house. Several reasons: 1) amount of income x debt is too low. 2) Expenses are too high, 3) you feel market is not great to buy, 4) you just dont want to add... or theres just bot a good opportunity in your horizon
For Any reason you can decide that the beat strategy for you is to have a better cash flow.
I invested in real estate ( thanks for long years working in financial markets) paying cash for all the houses i bought. Cause of that i got always deep discounts. This idea is criticized by many here in BP, but i do not care. Those believe i am doing a disservice and dont even think about my arguments. I had lots of cash receiving 3% at the bank and mortgage was 4.5% at the time. Plus closing costs and less deep discounts, was equivalent to me as it was better paying in cash.
The idea given here was very nice for those who want to set aside some savings, having some return. I know some people that need to put the money to work, otherwise it will end up spending it. This is just another reason to use the tool.
Also, as mentioned, as installments drops you can more easily get another loan ( income x expense ratio will improve), or just be able to refinance with more cash out. That will be available to you.
Antway, get the idea and use if you feel its worthy for you
Good luck
Without looking at your numbers, I wouldn't know the best direction to go. If getting a cash out refi fits your plan to provide the 20% you need for the house hack duplex and you can afford the higher mortgage payments on the property you took the cash out of by paying the HELOC or LOC, then it sounds like a reasonable plan and I look forward to hopefully hearing if you were successful and satisfied with how it went. I have thought about getting LOCs myself to use to get into other properties, but I haven't gotten that far so I probably won't be a good resource for feedback. My interest was boosting passive cash flow without refinancing and essentially debt snowballing the mortgage down as much as possible. I like your idea of using it for additional purposes and hope your mortgage hacking ideas work out. Bon chance!
@Alexandre Marques dos Santos
It's truly about what you're after. I've thought about paying cash in the future because my goal is to be a PASSIVE investor at some point, and paying cash certainly provides that. I think once I make it to the point in my investing career where I don't have to work, then I'll value passivity over income increases. I'm not materialistic, so I wouldn't want much more after that point. I love puzzles, though, so I'll still increase my income through analyzing possibilities, such as recasting, refinancing, etc.
@Scott Benton
For some reason, I've had difficulty grasping the benefits of HELOCs and LOCs. Since I've struggled, I could be wrong here, but I think one of them has a very short term. That would be terrible for me since I want buy, then rent it out and wouldn't get the money back in time. And I think the other (or both) just has such a high interest rate that it just wouldn't be worth it.
If I had any money left over after buying another property, perhaps I could use it to counter the HELOC or LOC by recasting. However, I'm not sure if the entire plan would result in something better.
Anyway, I appreciate the input.
You might want to consider taking a look at the BRRRR book by David Green from BiggerPockets if you haven't read it yet. That might potentially fit into a plan to use a HELOC or LOC even with short term products. In theory, it would help you get into a property, fix it up, rent it out, get a new appraisal that will now have a higher value since the property is repaired, get a new mortgage at the higher value, and then pay yourself (your HELOC or LOC) back, and do it all over again. There are other variations as well you will probably discover. There's also a good book on house hacking by Craig Curelop BiggerPockets published if you don't know that one as well. I thought it was great and would like to do a SFH house hack myself in the future.
Hope that's helpful.
@Scott Benton Interesting I have never heard of recasting , good information to pass on thanks for sharing.
I’ve a recasted a few times and it works for me. However, a recast play is not an across the board strategy for everyone. There are things to consider, primary of which is your long-term goals. You also have to understand that many seasoned investors will consider a recast as buying your cashflow. Granted, that can send us down an entirely new rabbit trail and I don’t want to hijack your post. The baseline figure is that you lower your payments by about $50 per $10,000 paid on a recast. So, what’s the point of a $5000 recast? Makes no sense to me. Furthermore, why not pivot that money to another investment or asset? To come full circle, as I wrote above, I have done it a few times and I consider is a tool in my belt to use when I want. But it’s not necessarily the first tool I reach for. As @Bill F. wrote, Just because you can do something doesn't mean you should.
@Nathan H. If it were me and I had a qualifying issue, I’d simply use the windfall of cash to put more money down on the place I was having trouble qualifying for. Unless your new loan has a drastically higher interest rate than your old loans...it simply doesn’t make sense to me to throw liquidity at something for the sake of proving cash flow.
Obviously all this can be avoided by buying the right deals 😎
@Whit B. I agree with you 100%, but there is an additional consideration, which is which one will take less cash to accomplish.
It depends on the borrower and conventional vs. non conventional loans. If we're looking at traditional Fannie/Freddie guidelines, they'll count 75% of rent towards the PITI to qualify for a property to be purchased. I haven't done the math, but I bet dollar for dollar, qualifying would be cheaper cash wise by putting that cash into something you already own and have proven financial.
I totally agree either could be best depending on a bunch of factors
Originally posted by @Scott Benton:I suppose it depends on what kind of money you want. In the case of recasting, I was able to convert cash (or potential portfolio income as you suggest the money is used for) into passive income. If I convert this cash into portfolio income instead of paying down my mortgage, I will pay (what) 20–24% on the gains every year, and for myself I know i would not be utilizing that money to replace a job, but rather would focus on reinvesting it back into the fund. That does not get me out of the rat race as much as it allows me to log into my brokerage account and watch those numbers grow, which is fun but there is no current utility for that revenue, and if I do use that money, I don't get to use the whole amount. I would pay roughly one quarter of it to the government straight out. However, if I convert that money into passive income instead by recasting and paying down my mortgage, then effectively I pay 0% in taxes on those "gains" or increased rentals I keep and utilize. Passive income is considered 0% money since effectively I don't pay taxes on it from the tax benefits I receive with rentals. Rental money vs. mutual fund returns is not an apple-to-apple comparison. In all cases and assuming the amount is the same for both sources, I would much rather have money coming in where I can use 100% of it versus 75% of it. If I make $1,000 in rentals, because passive income is taxed at 0%, I get to spend the full $1,000. If I take out $1,000 from my portfolio from gains (which I am unlikely to do), I get to spend about $750 and must send about $250 to the government.
I get much less purchasing power with portfolio income such as what I would get from mutual fund gains as you suggest.
Also, if you go by what John Bogle says about mutuals: “Do you really want to invest in a system where you put up 100 percent of the capital, you, the mutual fund shareholder, you take 100 percent of the risk, and you get 30 percent of the return?”, then that makes mutual fund investing even less attractive for me. Not only do I lose out on 70% of the potential gains however much the market goes up, but on top of that, I now have to pay about 25% to the government for the portion I do keep.
Looking at recasting as an option and growing my passive sources of income which I prefer of the there incomes (W-2 being the third), I would lean more in that direction myself. Sounds like that idea doesn't work for you and that you would rather focus on rates of return on mutual funds and paying more in taxes over passive. I respect your decision and the direction you take based on those fundamentals. I simply chose differently. There is no right answer for everyone, but this has worked wonderfully for me and might work well for others too.
Scott, I have no preference. The only things I care about growing my money the most I can with as little risk of capital loss as I can. Looks like we have different understandings of portfolio construction and weight the importance of taxes much differently, which is fine.
Point of clarification, you've based all your comparisons on investing in some sort of financial product, when that's not what I suggested. You can also buy a bond yourself and pay no fees.
Secondly, can you elaborate on how you pay 0 taxes on your passive income? For the vast majority of people, their passive income flows through to their personal return where they will pay taxes on it at their marginal rate. Recasting would in fact cause you to pay more in taxes, since you'll pay less interest... I don't know a lot, but I know that (1-tax rate)*100 is less than (1-tax rate)*500.
I mean, this is essentially a "delayed" down payment on a house.
As others mentioned, it depends on your goal.
#1. Security
or
#2. More aggressive wealth-building
I wouldn't discourage anyone either way.
Me, personally, my goal is to have $0 invested in each house. A "free" house essentially after refinancing. Then putting any lingering proceeds into other higher interest bearing investments rather than trying to save 3% on mortgage interest. (not to mention, you lose the interest deduction on taxes paying off houses)
-----
For me, I've "dreamed" about having all my properties paid off.
I've found it's really a mindset thing.
I'm scared one day I'll get hit by a car, can't work again, and my income goes to $0.
Possibility? Sure.
Likely? Probably not.
Trying to pay off rental properties early is a scarcity mindset that you'll run out of money in the future and will be foreclosed on.
Chances are pretty slim.
So keep your $5k, pay the higher mortgage payment, and ditch the fear :)
(said as a 32 year old, with a wife and 3 kids. People near retirement may feel much differently. Or, in an industry they were laid off from)
@Scott Benton the reason nobody talks about this strategy is because it makes no financial sense. You are giving the bank $5000 today, so that you can slowly get it back over the next 10 or 20 years. It is not increasing cash flow, it is called buying cash flow. You are trading todays dollars for lower value dollars tomorrow.
In my opinion the best use of recasting is for situations where people paid extra towards a mortgage and then wish they hadn't. Recasting is a way to start getting cash back out.
Do you understand my point? In an effort to increase monthly cash flow, you gave the mortgage company thousands of dollars. Keep your money and invest it. That is the entire point of leverage.
This strategy is like the Anit-BRRRR strategy or anti-HELOC. You are putting cash in, instead of taking it out.
@Scott Benton. thanks for the info! I was in the mortgage business for a long time and never heard of this. This is another nugget in the RE investor tool box! Thank you for taking the time to write about it.
You'll want to look into is what's known as "Velocity Banking" or Mortgage Acceleration.
I can see where recasting would help your cash flow in the short term. However, the larger goal for me would be interest reduction and equity build up by paying additional principal on a regular schedule. This does not require any additional interactions with the lender beyond specifying that the additional payment should be applied to principal. In the next payment cycle, the lender will calculate the usual interest based on the outstanding balance, in which case the interest amount will be lower since you paid additional principal and more of the scheduled payment will go toward principal reduction. The more often you can "throw a chunk" at principal reduction the further the interest due on the next payment will be reduced. In the end you will have paid less interest over the life of the loan and built up equity more quickly.
Also, there are some who advocate simply paying some additional principal on each payment and making a faster payoff / equity build-up that way.
I could even see combining recasting with mortgage acceleration.
Do what works best for you.
My $0.02 ...
@Joe Splitrock
That’s basically what I said yesterday. It just doesn’t make sense.
I'm not going to describe taxes. I might do a post about them later on after another article on mortgage hacking I am putting together right now. There are a couple of Kiyosaki videos you can find on YouTube that go into the different treatments of W-2, portfolio, and passive income if you want to watch those. You can read the Tom Wheelwright book TAX FREE WEALTH and several other books on taxes that are helpful I have found in order to self-educate on taxes which I find is extremely important to do for yourself, and arguably more important than studying real estate investing. For me there is nothing better than curling up late at night in front of a roaring fire and reading a big, thick book on taxes. Most people think there is only one tax law, but there are really two sets of tax laws and where a lot of the confusion comes. They couldn't possibly be more different. There's W-2 tax law and there's corporate tax law. You get to choose which set of laws you are going to follow and then do what they say. One makes you poor and one makes you rich. One has taxes as the first line item (W-2), and one has taxes as the very, very last line item (corporate taxes) and answers the question of why the rich get richer and the poor get poorer. Most people get a job and only earn W-2 money and don't think about learning anything at all about taxes, so they only have the W-2 tax laws to go by which won't ever do anything for them. Here's one Kiyosaki video I found. There are plenty of others you can find that go deeper into it. The Rich Dad books are also great. Read as many as you can stand. Read them all.
I'm not interested in stockpiling soft assets like mutual funds and bonds. Mutual funds have you put up 100% of the money, take 100% of the risk, and THEY get 70–80% of the profits. They make Wall Street extremely wealthy, not you. THEN you pay taxes on the gains, not to mention you are holding an instrument denominated in US dollars while Jerome Powell has promised the world he will print up whatever it takes to keep the economy afloat which means your paper assets become debased and not worth as much over time. How does that make any sense at all? And you are criticizing paying down principal on a mortgage to increase cash flow that is not taxed? At least doing that you still have your money converted into a hard asset that provides monthly cash flow for the rest of your life such as real estate which I might argue are the better vehicles to have your money in (gold and silver as well, but other hard assets such as a business, even a side business you build).
It made sense to put your money into bonds during the Volcker Put when bonds were paying around 15% or more (I think much more), where you could live off the yield without a lot of relative capital. People who were retired had saved their money and put everything into bonds and built a 30-year bond ladder that paid out healthy quarterly yields and lived well even though they had almost no financial education. You really didn't need to own any hard assets back then, but of course that happened because Paul Volcker was doing whatever he could to save the economy which actually worked at the time. Those days are long, long gone. No one had a problem with perpetual income back during the Volcker Put, but they have a problem with it now using a different vehicle such as real estate? Same plan, different machinery involved. Plus, this time around, you have to be far more financially educated than you did when all you had to invest in were high-yield bonds because you have to understand real estate and property management, or at least how to work with a property manager.
For me, bonds are also a waste of time right now. I don't know what they're paying because I don't care, but I don't see how getting 2–3% return on a bond is helpful even if you have municipals and don't pay any taxes on the gain. With inflation ripping you at 4% at the least—and we are in extraordinary times right now as I'm sure you realize with the Fed printing continuously and has crossed $27T already, not to mention the unfunded off-book liabilities, deficit, coupon payments to foreign governments on bonds, or the pensions—wouldn't that mean you are generating a negative interest rate on your money? I'm not sure how a negative return in bonds makes good sense. You get less money back than you put in. 3% up and 4% down.
I'm not advocating having ALL of your money in your mortgage. I am simply saying you have an opportunity to increase your cash flow in the case that you're not so in love with and fixated on the market return which you cannot control and is whimsical and unpredictable at best. I would say you have an opportunity to have both if you want.
While you can certainly sit around comparing the size of your interest rate to your friends' and how much bigger yours is to theirs in a soft asset like paper over a mortgage, you could on the other hand not worry about return in the market and focus a little more on increasing your passive cash flow in a hard asset such as real estate rentals that offer the best tax advantages you're going to get and also in a vehicle that tends to beat out inflation. Granted, we may be headed over a cliff for a 2008-level crash, and you can't evict tenants right now, so they could just stop paying you and there's nothing you can do at the moment but leave them in your property, but assuming you are getting your monthly rentals, isn't that a vehicle worth considering and possibly increasing?
As far as giving up the interest rate deduction goes, that really only happens when you pay off the property and retire the mortgage altogether. You still pay interest and you still get the write off benefits in full if you pay down the principal but still have the loan in place. That doesn't stop by chipping away at your mortgage a little bit and putting yourself in a stronger cash flow position.
Besides, even if you do pay off a mortgage and don't get the interest write off any longer on your taxes, is that necessarily the worst thing? You're instead keeping the entire mortgage payment (principal and interest) you otherwise would send out to the bank. If sending your money to the bank so that the government later on will give you 30% of it back at the end of the year makes sense to you, then I'll give you my address and you can send me your money instead, and I'll send you back 50%. Not getting that interest write off is not a deal breaker for me at all. Paying off a property, if you get that far, and I hope you do, allows for many future options including taking a portion off to buy more property and somewhat acting as the bank yourself, or you can simply enjoy the extra cash flow in the meantime that comes in while the market is hot and positioned for a massive meltdown which is kind of looking like might happen with the prolonged economic shut down. Time will tell.
Keeping all of your money in soft assets and sitting on a giant pile of cash, while a nice problem to have and a comfortable position to be in I admit, I have found is an enormous waste of time if that's all you plan to do.
You are more than allowed to feel completely differently and of course you must do what you are most comfortable with since it is your money that you are in charge of and not mine. Either way, we can still be friends and live in the same world peacefully. I have enjoyed this challenge, but want to focus on the next article I'm putting together that I also expect to get a lot of push back on. Thank you for the most enjoyable dialogue. This is the first posting of its kind I have done and fell as though I am now fully indoctrinated into the BiggerPockets universe. Much appreciation from me to you.