How We Increased Our Cash Flow By Recasting Our Mortgage

Imagine having a lump sum of money at your disposal. Exciting, isn’t it? We found ourselves in this exact situation recently and were overwhelmed with anticipation. Ultimately, our responsible, middle-aged adulting voice won and we decided to recast our mortgage. Recasting is a little-known secret in the financial world, but it’s something that has the power to substantially lower your monthly mortgage payment and increase your cash flow.

I recently divulged all about how we paid off a mortgage against all odds, referring to our first rental property. We have two total rental properties and at the beginning of 2020, we were staring down the barrel of a global pandemic coupled with possible job insecurity. To say we were stressed is an understatement.

We made a decision years ago to live only on one salary – my salary – and use my husband’s salary for paying down debt and investing. It has served us well over the years by allowing us to eliminate our student loans, car payments, and credit card balances. Ever since we knocked out our consumer debt, we only carried mortgage debt. You know, the supposed “good stuff”. But when we were hit with the pandemic on the heels of an announcement at work that could threaten my job security in the coming years, we panicked and refocused our energies on also knocking out the mortgages. 

The Hustle Is Real

Thanks to my husband hustling his butt off and creating work for himself, we were able to kick the mortgage on the first rental property to the curb late last year. And since we never wanted to feel stressed over the prospect of tenants not paying due to another unexpected set of circumstances, the obvious next step was to attack the mortgage on the second rental property.

The balance on the second property was a bit higher than the first so we knew it wouldn’t go quite as fast. The solution? We were going to recast the mortgage each time we had a lump sum in our grasp. And as luck would have it, my husband came through again. He was able to roll from one project right into the next and was paid a lump sum early this year. Making money as an independent filmmaker is always difficult, but in a pandemic-ravaged world, it’s nearly impossible. Thankfully, he refused to quit or take no for an answer, even in the current economic climate.

I can’t lie, after eliminating the mortgage on our first rental property, we felt such a sense of relief that we floated the idea of drifting from our plan. We tossed around the idea of finishing our basement or taking a once-in-a-lifetime trip to Alaska or Africa. But those ideas never got off the ground. We knew what we needed to do. We were going to recast the mortgage.

The Difference Between Recasting and Refinancing

Recasting your mortgage is vastly different from refinancing. When someone refinances a mortgage, they’re essentially paying off the old mortgage and taking a whole new one. Typically, refinancing is done to lower the loan interest rate or term. Sometimes both the interest rate and the term are reduced. However, doing so doesn’t always lower the monthly payment. 

For instance, if someone is refinancing their 30-year, 4% interest rate mortgage down to a 15-year, 3% interest rate mortgage, their monthly payment will actually go up, but the overall interest paid during the life of the loan will be greatly reduced. It’s a trade-off and there’s no one-size-fits-all solution.

If you’re interested in refinancing, check out this online calculator.

Recasting is a whole other ballgame. When someone recasts a mortgage, no aspects of the loan change, meaning the interest rate and term stay the same. What changes is the monthly payment.  Each lender has its own set of rules so it’s important to check with your particular lender if you’re considering it.

Most lenders allow recasting of a mortgage when applying a lump sum payment to the principal for either a small fee or no fee at all. Some lenders might allow unlimited recasts while others cap it at so many per year. Some might allow recasting for a minimum lump sum payment as low as $1,000, while others might require a minimum lump sum payment of $10,000. 

Ultimately, what happens during a recast is the application of a lump sum payment to the principal balance of your loan. Then the mortgage is recast to reflect that principal curtailment in your monthly payment, thereby reducing your financial obligation and increasing cash flow. Boom.

If you’re interested in recasting, check out this online calculator. This is also the one we used to determine our new monthly payment and it was accurate down to the dollar.

Related:

• How We Paid Off A Mortgage Against All Odds
• How Embracing Contentment Is Making Me Happy, Healthy, And Wealthy
• The New FI: Forget Financial Independence, Achieve Financial Improvement First

Why We Decided To Recast Our Mortgage

Most financial experts would call us crazy and accuse us of wasting our chunk of cash on paying down a low-interest mortgage. And they wouldn’t necessarily be wrong. After all, we almost certainly could’ve made more money by investing our lump sum in the stock market or any other investment that would yield us more than the interest rate on our loan. However, that’s the nature of personal finance and we’re fully aware that our decision was rooted in emotion, not logic. And that’s OK.

Funneling that money toward the principal on our second rental property was going to reduce our monthly financial obligation and increase our cash flow at the same time. And if that wasn’t reason enough, it was also going to reduce our stress. After experiencing the dread of job insecurity on top of the thought that our tenants might not be able to pay rent due to a global pandemic was the tipping point. We never wanted to feel that anxiety again. The choice was easy, even if it’s not widely accepted as the smartest financial move.

Things We Considered Before We Recast Our Mortgage

For most people, it’s not always easy to direct large amounts of money toward debt repayment or doing the right thing. We are not exceptions. When my husband landed another project early this year, we initially teetered on what exactly to do with it, even though we had our revised financial plan since last spring.

Humans forget quickly. And since it had been a whole year since we felt the anxiety of last spring, and we paid off our first rental property in the meantime, we weren’t as stressed and explored other options.

Other options for our money included:

• Invest it all in low-cost index funds 
• Split it between low-cost index funds and the mortgage principal
• Finish our basement
• Install new floors and take an unforgettable family vacation
• Take it to Vegas and bet it all on black – Okay, not really, but wouldn’t that be a rush!

In the end, we opted to embrace adulting and stick to our plan. 

Our Experience Recasting Our Mortgage

Our experience recasting our mortgage was an interesting one. It wasn’t difficult. It was just a little slow and clunky. I’ll start by saying that our mortgage is through a major national lender and the first time I called to inquire about the process I was told that the lender didn’t offer that service when, in fact, they had an entire department dedicated to it. This gives you some indication as to how many people aren’t using this financial tactic.  

I was finally able to get re-directed to the recast department where I could ask my questions regarding the process and cost. Fortunately, my lender didn’t charge any fees to recast the mortgage and the number of times I could recast was unlimited. I was also told the minimum amount needed to perform a recast was $1,000. So far so good.

As a side note, although you can recast your mortgage with a minimum lump sum of only $1,000, I’m not so sure the reduction in monthly payment would be worth the hassle.

In order to perform a recast, our account to be in good standing, which it was. Our lender also required us to either send a certified check or a wire transfer along with a faxed letter of intent to the recast department. Yes, I said a faxed letter. The letter needed to be sent at the same time as the wire transfer and needed to include the intention of the money to be processed as principal curtailment to reduce the monthly mortgage payment. 

I was told that if we wired the money and faxed the letter of intent no later than the 15th of the month, the department could recast the mortgage and reduce the monthly payment to be effective the 1st of the following month. As luck would have it, I contacted them during the first half of the month and we moved quickly to process the recast before the 15th. We sent the money and letter on the 9th of February and crossed our fingers that everything would work. According to my calculations, our monthly payment would be reduced by $350. We were excited.

The wired money posted to our mortgage balance within 48 hours, but the monthly payment didn’t update at the same time. I wasn’t worried. I figured it would take a little longer to actually recast the mortgage. Every day I would log in and check the payment due amount. Every day it was unchanged. I was told by the recast department that it could take up to 14 days to process and reflect on our statement. I waited until day 11 to call again.  

This time I spoke to a different representative that explained that I would receive a recast document that I needed to sign, date, and return before the recast would be finalized. The document was slated to arrive via FedEx and I would need to sign and date it and send it back via FedEx in the pre-paid postage envelope provided. Interestingly, the letter arrived within hours of that phone call. I immediately signed and dated it and drove it to the closest FedEx dropbox. Our mortgage payment was updated within 48 hours of document receipt by the lender. 

The Three Steps To Recasting Our Mortgage

1. I contacted our lender to determine the rules for recasting, confirming lump sum requirements and any associated fees.
2. We sent a wire transfer at the same time we faxed a letter of intent for the funds, outlining the money was to be used for principal curtailment and a reduction in the monthly payment.
3. We signed, dated, and returned the official recast document to the lender.

Recasting isn’t for everyone and it’s likely not the most financially-savvy move you can make with a big chunk of cash. However, it’s hard to argue against paying down debt and eliminating stress.

So if you ever find yourself in a situation where you have a lump sum of money to allocate and aren’t sure what to do, recasting your mortgage might be worth considering. We’re still thrilled with our decision.

What are your thoughts on recasting?