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Improve Your Cashflow With Mortgage Recasting: An Alternative To Debt Snowballing

Summary: If you are looking to pay down your mortgages to improve your debt/equity ratio, you may want to consider mortgage recasting. While mortgage recasting is a lesser known way to save on monthly payments, the benefits of recasting can be significant if you can find a lender who will recast your mortgage for a nominal fee. If you are thinking of getting into real estate investing or even if you already own multiple financed properties,  we would recommend that you ask your lender about mortgage recasting to see if they offer it and at what cost. If your lender doesn’t offer recasting or it is too expensive to justify, you should consider switching your lender the next time you buy a property, to allow yourself greater flexibility in the future.

 

Leti and I have an ongoing debate about leverage (i.e., how much we should keep in mortgage loans relative to the equity in our properties).

She wants to stay more leveraged in order to maximize our return on equity. She is willing to accept more risk for faster growth.

I’m more conservative, mainly because of past investing mistakes, so I want to de-leverage by paying down the mortgages on our properties. I’m willing to accept slower growth for less risk.

Over time we’ve ended up somewhere in the middle of our extremes, having settled on a compromise goal debt/equity ratio of around 60%/40%.

Which brings us to the topic of this article. Assuming you have multiple mortgages with different interest rates and want to pay down your mortgages, what is the best way to go about doing this?

 

Ways to Pay Off a Mortgage

Traditional teaching dictates that you should concentrate on paying off one mortgage at a time. By doing so, you eliminate a mortgage payment and increase your cashflow. With the increase in cashflow, you now have more money to chip away at the next loan.

There are two main ways to do this.

You can start by paying off the loan with the highest interest rate. This reduces the amount of money paid in interest over time.

An alternative is a method popularized by Dave Ramsey called debt snowball, where you focus on paying off the loan with the smallest balance, regardless of the interest rate. Though you’ll pay more in interest using this method over time, there is a emotional benefit to paying off a loan, which can motivate you to pay off the next loan faster.

Over the last couple of years, we’ve been debt snowballing. However, we were recently introduced to what may be an even better way to pay off your mortgage: mortgage recasting.

 

What is mortgage recasting?

Mortgage recasting is when your lender adjusts down your monthly mortgage payment when you make an equity payment (a payment on top of your usual monthly mortgage payment). The bank essentially takes the new loan balance and re-amortizes it using the same interest rate and term. Not only does your monthly payment go down, you also pay less interest over the life of the loan.

For example, we currently have a $108,500 loan at 4.625% interest and amortized over 30 years. The monthly principal and interest payment is $557.84. If we made a $10,000 equity payment and recasted our mortgage, our monthly payment would go down by $52.06 to $505.78 (and cashflow goes up by the same amount). The total interest we would pay over the life of the loan goes down from $92,323.34 to $84,086.31, a savings of approximately $8,200 over the life of the loan.

This is completely different from refinancing, where you get a completely new loan with a new interest rate and amortized over a new term (e.g., 15 or 30 years). Refinancing is also considerably more expensive than recasting.

 

Who offers mortgage recasting?

Most of the major banks reportedly offer mortgage recasting, however, they don’t advertise it. A quick google search didn’t reveal any articles by the major banks about mortgage recasting on their websites.

Our lender (Caliber Home Loans) offers mortgage recasting for a small fee ($250).

 

Who is eligible? What are the requirements?

While the eligibility rules may differ among lenders, generally recasting is not available for certain loan types: Federal Housing Administration (FHA) loans, Veteran Affairs (VA) loans, Government National Mortgage Association (GNMA) and jumbo loans.

Our bank has additional requirements:

  • The loan must be paid current.
  • The recast process cannot commence within 60 days from the date the loan closes.
  • A principal reduction payment of $5,000 or more is required.
  • The recast process must be requested within 60 days of the principal reduction payment.
  • The first monthly payment following the principal reduction payment must be made at the regularly scheduled amount; thereafter, the reduced principal and interest payment amount will be due.
  • A form or application is not required to begin the recast process; however, the signed recast agreement must be received prior to executing the recast.
  • A program processing fee must be paid in the amount of $250.
  • You can only recast once per year.

 

What are the downsides of mortgage recasting?

The main downside of mortgage recasting is the fee for recasting. And if you recast your mortgage multiple times, the fees can really add up over the years. With that said, the cost is considerably less than what you would pay for a refinance.

Of course, all of this assumes that you want to pay down your mortgages. There is an opportunity cost to paying down your mortgage that we have not considered, however, this isn’t specific to mortgage recasting but any method of paying down your mortgages.

 

What are the benefits of mortgage recasting?

As described above, the main benefit of mortgage recasting is that you can improve your cashflow even with small equity payments. With debt snowball, you have to fully pay off a loan to improve your cashflow – which could take years.

The other major benefit of mortgage recasting is that you can preserve your liability protection.

Having a loan on a property is thought to give you some degree of asset liability protection because a property with a loan isn’t as attractive a target for lawsuits as a property that is fully paid off (because there’s more to gain in a lawsuit). This is why mortgage recasting gives you the ability to increase your cashflow without losing your liability protection.

 

I don’t have any properties yet, does this apply to me?

When you start building your real estate business, one thing that is sure to come up early in the process is your risk tolerance. Whether you lie on the side of Leti (high leverage, higher risk) or me (lower loan to value ratio) or even somewhere more extreme (pay for properties only in cash or have the least amount of equity in your properties), you will need to decide how comfortable you (and your partner) are with having debt.

More specific to mortgage recasting, even if you don’t own any properties, finding a mortgage lender is one of the first things you’ll do as a new investor. Given the above benefits, we think that mortgage recasting is important enough to use as a screening criteria when choosing your mortgage lender. If your lender doesn’t offer it and it’s important for you to have this option, you should probably find another lender who does.

 

What is your goal debt/equity ratio for your properties?

If you are planning to pay down the mortgages on your properties, what method are you planning to use?

 

Join the conversation in our Facebook group or follow us on Twitter and Instagram! And please share this article with anyone who might find it useful.

Do you want to learn how to creatively fund your real estate portfolio and achieve financial freedom? Join the conversation! Follow our Semi-Retired MD  Facebook page and join our Doctors or Professionals  group!

Semi-Retired M.D. and its owners, presenters, and employees are not in the business of providing personal, financial, tax, legal or investment advice and specifically disclaims any liability, loss or risk, which is incurred as a consequence, either directly or indirectly, by the use of any of the information contained in this blog. Semi-Retired M.D., its website, this blog and any online tools, if any, do NOT provide ANY legal, accounting, securities, investment, tax or other professional services advice and are not intended to be a substitute for meeting with professional advisors. If legal advice or other expert assistance is required, the services of competent, licensed and certified professionals should be sought. In addition, Semi-Retired M.D. does not endorse ANY specific investments, investment strategies, advisors, or financial service firms.

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Hi, we’re Kenji and Leti

we provide coaching and mentorship for doctors and high-income earners

Several years ago, we were newlyweds working as full-time hospitalists. On paper, it looked like we had everything: the prestigious careers, the happy marriage, the luxurious rental home, the cars, etc.

But in reality? Despite having worked for several years, we had very little savings. Despite our high income, we had very little freedom in terms of time or money.

One thing was clear: we had to do something.

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