What Is a Scheduled Recast?
A scheduled recast is a recalculation of the remaining payment schedule of principal and interest payments for a mortgage. A mortgage is a type of loan in which a bank lends to a borrower for the purchase of a home. The recast is done on a predetermined or scheduled date.
Some mortgage programs allow homeowners to make early payments on loans that are not fully amortizing, meaning the payments don't reduce the principal balance owed. Later on, at the scheduled recast date, a new amortization or payment schedule is calculated based on the principal balance at that time and the remaining term (or time left to pay).
A scheduled recast is important since it helps to ensure that the mortgage will be paid off by the end of its original term. However, a scheduled recast can result in an increase in the payment amounts for the remaining payments.
- A scheduled recast is a recalculation of the remaining payment schedule of principal and interest payments for a mortgage.
- A scheduled recast is done on a predetermined date and ensures that the mortgage will be paid off by the end of its original term.
- A scheduled mortgage recast can be an alternative to refinancing since the recast is not a new loan, nor is a credit check needed.
How a Scheduled Recast Works
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. In some cases, a borrower might make a principal payment to reduce the loan amount outstanding. The loan payment schedule can be recast, which creates a new payment schedule to reflect the reduced borrowed amount.
The payment schedule of a mortgage is called an amortization schedule when a portion of each payment is applied to the interest due and the outstanding principal balance. The scheduled recast date is when the lender calculates the new payment and amortization schedule based on the mortgage's remaining principal balance and term. In other words, the remaining balance owed is spread out over the existing term of the loan to calculate the monthly payments.
If a principal reduction payment has been made, the borrower would likely expect the monthly payment to decrease following the scheduled recast of the mortgage. Many mortgage providers offer a scheduled recast of the payment schedule if the borrower has made an extra payment to reduce the principal amount owed. However, lenders usually require that the loan is in good standing, meaning there are no late payments due.
Scheduled Recast vs. Refinancing
A mortgage recast can be a better option than refinancing a mortgage. With a refinance, the current mortgage is replaced with a new mortgage loan, which is typically done when interest rates in the market are lower than the original rate on the loan. However, since the refinancing is technically a new loan, it can be costly with added fees, and the loan approval depends on the borrower's credit standing.
On the other hand, a mortgage recast is not a new loan and as a result, doesn't need a new approval, nor a credit check of the borrower. Instead, the recast modifies the loan payments, but the original mortgage loan is not replaced.
Scheduled Recast of Adjustable-Rate-Mortgages
An adjustable-rate mortgage (ARM) is a type of mortgage in which the initial interest rate is fixed for a period of time, and after which, the interest rate is reset to reflect current rates in the market. There are different types of ARMs, which might allow borrowers to make interest-only payments for a period or adjust the size of the payments during the life of the loan.
Payment Option ARM
Scheduled recast is common with a payment option adjustable-rate mortgage. A payment-option ARM is a monthly adjusting ARM, which allows the borrower to choose among the following:
- 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 that 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.
Scheduled Recasts and Higher Monthly Payments
Adjustable-rate mortgages, including payment-option ARMs, allow borrowers to make smaller payments, which can help with affordability. However, the overall debt or mortgage amount owed can grow substantially over time. For example, if the payments don't pay down any of the principal, the interest on the debt keeps building to the point where the loan balance increases. As a result, the scheduled recast could lead to a higher mortgage payment in order to pay off the loan in time.
Qualifications for a Scheduled 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, which are federally-backed home mortgage companies that guarantee mortgage loans for lenders.
Loans backed by the Federal Housing Administration (FHA), which tend to help low-income, first-time homebuyers, and Veterans Administration (VA) loans are not eligible for a mortgage recast. However, there is an exception in the case of a loan modification, which is a change to the terms of the loan—usually when the borrower cannot repay the loan. USDA Rural Development loans do allow for recasting the entire loan.
During a scheduled 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% of the current balance owed. Borrowers are typically given the opportunity to recast their mortgage once during the term of the loan. However, some lenders offer additional recasts if another principal payment is made later in the life of the loan.