Real estate investors are constantly looking for ways to save money, increase their cash flow, and grow their real estate investment portfolios. One way some investors accomplish this is through a method called mortgage recasting.
Mortgage recasting an investment loan is a strategy that most real estate investors have access to, but is recasting a mortgage a good idea? Much like refinancing an investment property mortgage, there are both benefits and drawbacks. Investors must be knowledgeable about how a mortgage recast could affect them before deciding.
In this article, we will discuss how to recast a mortgage, as well as the pros and cons of mortgage recasting, so you can decide if this strategy is right for you.
What Is a Mortgage Recast?
In simple terms, a mortgage recast is a readjustment of your monthly investment loan payment. It does not change any of the terms of the loan, such as the interest rate or length of the loan. However, it will likely lower your monthly payments, making it an attractive option for real estate investors who want to see increased cash flow.
If you are wondering how your monthly payments could decrease without extending the life of the investment loan or refinancing, the answer is: you must pay ahead.
By paying ahead on the principal owed, you have the option to reamortize or adjust your monthly payments to account for the lower principal owed. This is what a recast does. Without mortgage recasting, paying ahead would not decrease monthly payments. Instead, it would simply shorten the life of the loan.
Is It Better to Recast or Pay Down Principal Owed?
The answer to this question truly depends on what your goals are as a real estate investor.
Essentially, paying down the principal owed on the loan is what you do when mortgage recasting. However, mortgage recasting requires the additional step of reamortizing to adjust monthly payments.
It is possible to pay down the principal owed without recasting, and we will walk you through an example to get a better understanding of the benefits of each.
Mortgage Recast Example
Let’s say you owe $200,000 on a 30-year fixed-rate mortgage and your monthly payment is $1,000, at a 4% interest rate. You have $50,000 to pay toward the loan’s principal. You do this, and then you recast your mortgage. The new monthly payment would be roughly $750, the original payment reduced by $250. In addition, the interest you would save over the life of the loan would amount to approximately $32,000.
Now, let’s suppose that you choose not to go through with mortgage recasting. With the same $200,000 loan, 4% interest rate, and $50,000 advance principal payment, you would save around $70,000 over the life of the loan in interest.
As you can see, the most money is saved by paying down the principal. When paying down the principal, your payments are applied to the end of the loan, shortening its lifespan. Because of the reduced time frame of loan payments, the interest accrued significantly decreases.
With mortgage recasting, you maintain the same loan time frame. Because the principal is reduced, you will pay less interest on it. However, with a longer time frame, more interest is collected on the loan.
If your goal is to save money, it might be worth paying down the principal on your investment property mortgage. However, mortgage recasting does have its uses.
Advantages of Recasting a Mortgage
- You will experience an increase in cash flow.
- It allows you to save money on mortgage payments and interest.
- Recasting frees up money to invest in other properties or investments.
- There are minimal to no fees for processing a mortgage recast, depending on your bank.
- The time frame and effort required to recast your mortgage is typically minimal, with some real estate investors claiming only to have to make a phone call, sign, and notarize paperwork.
Disadvantages of Recasting a Mortgage
- Not every bank will allow mortgage recasting, and some will automatically apply principal payments to the end of the loan. You must check before assuming you can go through with the process.
- You will save more in interest by simply paying the principal.
- Some banks have rules about the number of times a person can recast a mortgage, with some only allowing it once.
- You cannot change your interest rate, loan term, etc.
Is Recasting a Mortgage a Good Idea?
Paying down the principal early will save you the most money in the long run on that one particular investment property. But, it will not increase your cash flow. Having more cash on hand allows real estate investors to build wealth. Therefore, paying the principal will not allow you to grow your real estate investment portfolio as quickly as mortgage recasting would.
If you have some money to put towards the principal on your investment loan and you are wondering if you should consider mortgage recasting, think about this:
- Decreasing your monthly payments leads to higher cash flow.
- Higher cash flow means potentially higher savings and cash reserves.
- Higher savings and cash reserves grant investors the ability to purchase new income properties and build their portfolios.
- The larger your real estate investment portfolio, the higher your potential for passive income will be.
Returning to the example mentioned above, if you thought that saving an additional $38,000 in interest was the financially advantageous option, you might want to reconsider. By focusing on increasing your cash flow immediately, you can quickly save for new investment properties.
Shortening a mortgage and saving on interest is great, but it might not pay as well as owning more properties. Especially if each of your new properties yields a high return on investment, which is easily accomplished with Mashvisor’s real estate investment software.
Imagine being able to acquire just one more property as a result of recasting your mortgage and lowering your monthly payment. Hypothetically, this new investment property could bring in $15,000 or more per year. After just a few years, you’ve already likely recovered the cost of the extra interest payments. In the long run, the extra property pays off:
30 years x $15,000 per year = $450,000
Overall, mortgage recasting is a great strategy for investors looking to increase their cash flow and build their real estate portfolio quickly.
An easy way to figure out if mortgage recasting would benefit you is to use a mortgage recast calculator. Every individual circumstance is different. Therefore, investors should make calculations and familiarize themselves with the rules governing their particular loan before considering recasting.
Whatever strategy you choose, make sure your investment decisions are backed by Mashvisor’s data and real estate investment tools. To learn more about how we will help you make faster and smarter real estate investment decisions, click here.