- November 26, 2020
- Posted by: Editor
- Category: Advice, Analysis, Strategy
Real estate investors are incessantly 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.
What Is a Mortgage Recast?
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 re-amortize 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.
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.
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.
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.