What Is Loan Re-Casting?
ARM loans have adjustable payments but a set loan term — usually 30 years. Many ARM products are arranged so that every five years the loan is “re-cast.” This means the payments are adjusted to assure the loan can be re-paid in the remaining loan term.
The reason re-casting is necessary is that monthly payments may not be enough to pay off the mortgage during the remaining loan term. To assure that the loan will be self-amortizing, the loan is re-cast every five years. This stops the creation of a balloon loan — a loan with a huge final payment.
Also, ARMs that allow negative amortization — such as option ARMs — have a second form of re-casting. If the monthly payments are less than the interest cost for the loan, the unpaid interest is added onto the principal amount. When the debt reaches 115, 120 percent or 125 percent of the original debt, the loan is re-cast. Notice that the five-year re-casting deadline does not apply nor do annual caps.
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