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.