A mortgage recast is a loan modification that changes the amortization schedule on an existing mortgage. The result may be that monthly payments increase or decrease, depending on why the mortgage is being recast. Mortgage recasting retains the original lender and may keep the original terms as well. A lender must agree to recast, but if a lender is willing to work with a borrower, recasting can be a better option than refinancing.
Historically, one of the most common reasons for a mortgage recast was because the loan was a negative amortization mortgage. On a so-called "neg-am" loan, the borrower is paying less than the interest accrued every month. Not only is the borrower not paying down the principle, but the balance on the loan is actually increasing because the unpaid interest starts to add up. This type of loan is sometimes used for short-term financing, and it usually has a mortgage recast, also known as a reset, built in. When a neg-am loan is recast, the lender recalculates the payments, increasing them so that the borrower will pay the loan off within the time frame of the loan.
People can also specifically request a mortgage recast. Sometimes people pay a little extra every month or apply a windfall of cash to a mortgage, paying down the loan sooner than expected. These borrowers can maintain the current repayment schedule and simply pay the loan off sooner, or they can ask for a mortgage recast. The mortgage recast recalculates the payments to redistribute them over the life of the loan, causing them to drop.
A third reason for a mortgage recast is a distressed borrower. People who cannot make their monthly payments can ask for a reduced interest rate or forgiveness of part of the principle, followed by a recast to adjust the payments. This is an alternative to losing the home to foreclosure. Lenders are not always amenable to assisting distressed borrowers, and it may be helpful to consult an attorney for advice on working with a lender.
In cases where a recast is scheduled, the borrower has no say in the matter; the lender will send documentation indicating that the payments were recalculated and that the monthly statements will change. Unscheduled recasts initiated by the borrower can save money for borrowers every month, if the lender will agree to the account adjustment. People can use mortgage calculators to see what happens when a loan is recast, and they may want to pay attention to the total amount paid in interest before and after the recast.
