If you are thinking about taking out an Option ARM you will probably hear a few terms that you are not familiar with. Each lender sets their own requirements dictating under what conditions your loan will be recast, but the premise is the same. When your loan is recast the lender adjusts the amount of your monthly payments to ensure you are able to payoff the mortgage within the original mortgage term (typically 30 years).
Under a mortgage recast, lenders will re-amortize your mortgage if you make a sizable principal reduction while still keeping the original terms. If your $350,000 loan is paid down by $250,000, request to have your loan recast upon the remaining balance keeping your same rate and term. This can avoid the associated closing costs of another refinance.
Most Option ARM mortgages will recast after the loan amount reaches 110-120% of the value of the home or
afar 5-10 years which ever comes first. This can be a very dangerous situation if your home is not appreciating or if you are making the minimum payment every month.
If you typically make the minimum payment allowed on a pay option ARM your payments will most likely increase dramatically when your loan is recast. When this happens you can make the higher payments to payoff the loan faster, or refinance into a new loan, with new terms.
When your loan is recast after making your monthly payments your loan balance will actually adjust, either up or down, depending on what type of loan you have and how much of a payment you are making. Your monthly payment will adjust either up or down based on the new loan amount. Some lenders will recast your monthly payment or your new loan amount at certain intervals such as some will recast every month, some will recast every 6 months, etc....