What is a Scheduled Recast
Scheduled recast is a recalculation of the remaining amortization schedule of a mortgage at a certain date that is set and known in advance. Some mortgage program allow homeowners to make early payments on mortgages which are not fully amortizing. Then, at the scheduled recast date, a new amortization schedule is calculated based on the remaining term and principal balance at the time, which ensures that the mortgage will be paid off by the end of its original term. This usually means that the remaining scheduled payments will increase.
BREAKING DOWN Scheduled Recast
Scheduled recast is a term most often associated with a payment option adjustable rate mortgage (ARM). A payment option ARM is a monthly adjusting ARM, which allows the borrower to choose between several monthly payment options, including: a 30- or 40-year fully amortizing payment; a 15-year fully amortizing payment; an interest-only payment; a minimum payment or a payment of any amount greater than the minimum.
Payment option ARMs have a feature which allows for the accrual of deferred interest. The deferred interest created at each payment date is added to the principal balance of the mortgage. This is known as negative amortization. Often, at the end of the fifth year there is a scheduled recast date. On this recast date, the amortization schedule is recalculated so that, based on the remaining principal balance and the fully indexed interest rate at the time, the future payments will amortize the mortgage over its remaining term.
A mortgage recast is an option included in some mortgages that can result in lower interest rates and an extension of the remaining term of the mortgage. It can also be a more comfortable option than refinancing. With a refinance, you replace your current mortgage with a new mortgage loan, which can be costly and depends on your credit standing. A mortgage recast does not involve a credit check and continues with the original mortgage. However, a lender may not advertise that it offers recasting, because refinancing or keeping you on your existing mortgage term is often more profitable for them.
Qualifications for a Mortgage Recast
Not all mortgages qualify for recasting. In almost all cases, a mortgage cannot be recast unless it is backed by Fannie Mae or Freddie Mac. FHA loans and VA loans are not eligible unless it is for a loan modification. During a mortgage recasting, an individual pays a large sum toward their principal, and their mortgage is then recalculated based on the new balance. That principal contribution amount must meet or exceed the minimum requirement of 10 percent of the current account balance. In addition, borrowers are typically given the opportunity to recast their mortgage once during the term of the loan.