Scheduled Recast: What It Is, How It Works With a Mortgage

What Is a Scheduled Recast?

A scheduled recast represents a recalculation of a mortgage loan's remaining principal and interest payments, which occurs on a predetermined date. Some mortgage products allow homeowners to make loan payments that do not reduce the principal or the original amount borrowed.

Later on, at the scheduled recast date, the lender calculates a new amortization or payment schedule based on the balance at that time and the remaining term or the time left to pay. As a result, the borrower's monthly payment can increase for the remainder of the loan. A scheduled recast can help ensure a mortgage gets paid off by the end of its original term.

How a Scheduled Recast Works

In a mortgage recast, a lender recalculates a loan's amortization schedule, which shows the amount of each monthly mortgage payment over the remainder of the loan and the portion of each payment that goes to either principal or interest. A larger percentage of the monthly payment gets applied to the principal and less to interest over time, gradually paying off the loan.

In some cases, borrowers can initiate a mortgage recast by making an additional lump sum payment. The mortgage lender will then calculate a new amortization schedule based on the loan's lower outstanding balance, resulting in a smaller monthly payment for the borrower.

In other instances, loans have built-in provisions to automatically recast at certain points in time, known as a scheduled recast. These loans tend to allow for low monthly payments at the outset that may not fully cover the interest cost. As a result, negative amortization occurs where the loan balance increases rather than decreases. Conversely, the payments of a conventional amortized loan contain a combination of principal and interest so that the loan balance gradually decreases.

Payment schedules that don't reduce the principal cannot continue indefinitely since the loan would never get paid off. Instead, the lender recasts the loan at a predetermined date, increasing the monthly payments to sufficiently to pay the off loan on schedule. A lender might also require a balloon payment or lump sum payment at the time of the scheduled recast.

Scheduled Recasts vs. Adjustable-Rate Mortgages

With a traditional, fixed-rate mortgage, the interest rate stays constant for the life of the loan. A fixed-rate loan is not subject to a scheduled recast. However, the borrower can voluntarily initiate a recast by making an extra lump sum payment. The payment won't change the loan's interest rate or term, but it will reduce the loan balance and, in turn, the total interest cost of the loan.

Adjustable-rate Mortgage (ARM)

An adjustable-rate mortgage (ARM) is a type of loan in which the initial interest rate is fixed for a certain period of time, after which it can rise or fall periodically to reflect current rates in the market.

There are a variety of types of ARMs with different payment structures and other provisions. Scheduled recasts are especially common with payment option adjustable-rate mortgages, also known as option ARMS. A payment-option ARM offers the borrower the choice of several ways to pay, including a fully amortizing payment, an interest-only payment, or any payment over a certain minimum.

Deferred Interest and Scheduled Recast

Some of these options are insufficient to cover the full amount of interest due that month. Some payment-option ARMs have a feature that allow for deferred interest or interest that accrues. The deferred interest from each payment gets added to the mortgage loan's principal balance, increasing your loan balance over time or negative amortization.

These deferred interest ARMs will have a scheduled recast date, often every five years. At that point, the amortization schedule gets recalculated based on the outstanding loan balance and the current interest rate. As a result, the recalculated future payments pay off the mortgage by the end of its remaining term.

The Bottom Line

A scheduled recast is a feature in which the loan payment schedule gets recalculated, which occurs on a predetermined date. The initial loan payments may not adequately cover the interest or reduce the principal amount. At the scheduled recast date, the lender calculates a new amortization schedule based on the balance at that time, which can increase the monthly payment, perhaps substantially.