Recasting: Mortgage Hack Your Way to Increase Your Cash Flow

[Scott Benton]

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.

[Chris Gottshall]

@Scott Benton I just learned about recasting this summer when I refinanced my primary residence. I’m not sure if I will use it on my rentals but I’ll definitely take advantage of this option to decrease my personal housing payments over time, which puts more cash in my pocket each month.

One thing my lender told me at the time was that while every Fannie/Freddie loan can take advantage of this, not all lenders or services will support the option, precisely because of the fact that they make more money via refinancing. Your post makes it sound like all servicers will do it if asked. I’m curious if you have encountered any servicing companies that flat out won’t support this option. Or is it just a matter of finding the right person to talk to?

[Scott Benton]

I have not had a problem so far but I have not gotten a mortgage lately. The last time I got a mortgage, I was very specific about wanting to prepay it without penalty and was told I would be able to do the recast. However, I don’t know if that was lip service or if something that was put in the mortgage to that effect. I just don’t remember right now and would have to go back and find the closing documents. Shortly after I closed on the loan, it was sold to another big bank. I always had it in my mind that I was going to prepay some of it off and see if I could get the payment down, and why later on I started calling the bank to see if I could figure out how to do this once I had a little bit of money to try it out. I do not know what would happen now if I got a new mortgage, but recently was told by a mortgage broker that there are no pre-payment penalties on any loans, and I don’t know what the policies are individually at all banks. As I mentioned in my post, I had to keep calling the bank loan services over and over until I got all of my questions properly answered and understood the process. I first time through the recast process was somewhat of a mystery, but I kept going and realized it’s pretty much a no-brainer and really easy to do. 

[Shelby Ek]

When I first started reading this post and replies I had similar thoughts as others, this idea is the opposite of using leverage to scale.  But I can see how this might be a useful option for people in  specific situations, in fact I might be one of them.

Before I came around to understanding how debt can be used as leverage I was paying extra on my mortgage every month (low interest rate, owner occupied duplex I was house hacking).  As I learned more I realized this was some of the cheapest money I could borrow and I was better off putting that extra money every month toward another purchase. I regretted making those extra payments and I always kinda figured that money was now trapped in equity.  I never knew about the option to recast a loan so I just did the math and it looks like a recast would reduce my payments by $40/month.  So for me it's definitely worth at least a call to the bank, if I can do it and there is no fee I just increased my cashflow by almost $500 a year.

So thanks @Scott Benton for sharing this information. 

[Scott Benton]

@Shelby Ek

I hope you are able to recast without any trouble and raise up your cash flow. 

[Bill F.]

Originally posted by @Scott Benton:

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. 

 Little surprised that asking a simple question like "how do you not pay taxes on your passive income" involved insulting not one, but two Chairmen of the Fed, but then again, this is the internet, so I should learn not to be surprised. Motivated Reasoning abound! 

You and I clearly have different understandings and outlooks on investing, but as you so eloquently put it, we can still be friends and live in the same world! 

Best of luck and welcome to BP. As the proverb goes: "As iron sharpens iron, so one person sharpens another." I always enjoy hearing other perspectives and rationals. 

See you around. 

[Scott Benton]

You're funny. 

[Josh Kindrat]

Good Afternoon Bigger Pockets,  

First time posting in the BP community. I apologize in advance for bringing up and old thread. However I have a question in regards to my personal rental situation and would like to hear experienced investors opinions about the pros & cons. 

I purchased my first rental property 3 years ago, and still living in it as a house hack while paying off $60k in student loans. (Loans are now completely paid off.) During the 3 year time frame, my property has a remaining mortgage of $224,000 and a current value of $300,000 with 19 years remaining on the amortization, at a 1.74% interest rate.

My question is, would it be a good idea to recast/re-amortize my property from 19 years to a 30 year amortization? One thing from the original post that I don't understand is why do you have to put any amount down in order to reap the benefits of a recast? If I were to recast from 19 to 30 year amortization there would be a significant increase in monthly cashflow as well as the added bonus of more tax benefits from paying more interest than principal. 

This would increase cashflow instantly which would allow me to save more monthly, and have control over where to invest that money. As well as leaving a cashout refi opportunity in the future. Being able to use both methods on the same property within a couple of years. 

Thank you very much in advance! Please let me know if my understanding is incorrect. 
 

[Ben Yoder]

@Scott Benton

Thanks so much Scott. I am definitely going to use this in my plan. I’m thinking it will help me to snowball on one property and pay it off that much sooner.

[Scott Benton]

@Ben Yoder

It was very helpful for me and hope it does the same for you as well. 

[Scott Benton]

@Josh Kindrat

When I did my recasting, I was not able to change the duration of the loan. The amortization schedule remained the same, but since I had paid down some of the principal amount, I was able to recast THAT portion of the loan and the overall payment went down. I do not know the laws in Canada, but from a US perspective, what you are describing sounds more like a refi to me than it does a recast. I was not interested in restarting the payment clock from, say, 20 years back to 30 with a refi and why I chose to recast instead. With a recast there was no fee included, and with a refi, I would have had to pay a few thousand dollars to complete. I would assume Canada would be the same. Paying a few thousand dollars for a refi does bring the payment down, but then in theory it would take several months if not years to make up for the amount you had to pay for the new refinanced loan. 

On the other hand, if you are only interested in having a lower payment and happen to have a few extra thousand dollars to complete the refi, then maybe it's worth it. I have done that in the past myself, but I did it before I understood the recast option. Once I figured out recasting, I found I preferred that instead and focussed on a debt snowball payoff strategy instead of refinancing. 

Not sure if that helps your situation or helps inform your thinking about it, but I hope it does. Also, again, I don't know Canadian banking, but I would check with your bank to see if your country offers the same recasting option that the US offers. I would assume they do, but I don't know for sure if that is the case. It might not be possible there. 

[Keith Andrews]

I'd like to add one more piece to this. Prior to recasting or re-amortizing the loan, see if you can lower your home insurance as well and drop PMI if you happen to have that attached to the loan. I have re-amortized more times than I have refinanced over the years and it has exponentially increased my cash flow.

[Kevin Phu]

Okay, I just read through every post on here and I think I'm starting to understand the concept and opposing views. I want to provide a few situations and hopefully someone can tell me if I am understanding this properly.

Situation #1: I have 1 SFR rental that I have never made an additional principal payment on. I have two choices: 1) continue to make no additional principal payments or 2) make a large lump principal payment.

Choice #1 would mean there is no point in recasting so all payment amounts remain unchanged.

Choice #2 would mean I can recast and lower my monthly payment by X amount therefor my cashflow increases by the same X amount as well. However, that means more taxable income come tax season which is a whole other discussion/consideration.

Situation #2: I have a primary SFR that I purchased with 20% down and have been making an additional principal payment every month for the last year. In this scenario, I have the option of recasting since I've been paying additional principal. If I do recast, my monthly payment lowers by X amount which means I can save the X amount. This X amount would not be taxed because it's my W-2 money. However, because it was recast, the earlier payoff date from the extra payments would go away and shift back to the original date negating the whole reason I've been making additional payments in the first place.

All correct?