Question:

What does negative amortization recast mean?

Answer:

The negative amortization recast happens when your deferred interest loan has reached the negative amortization loan cap (the amount it can grow to) and your monthly payments are recalculated on the basis of remaining mortgage term, interest rate and new loan balance.

Example of Negative Amortization Mortgage Loan Recast

Consider a loan of $200,000 that is allowed to reach $220,000 (110%) before the recast. Also, consider that you have 5 years to use the minimum payment option. Usually, if the borrower is heavily making only minimum payments, the home loan negative amortization recast is scheduled to occur somewhere before the end of the 3rd year. If the recast kicks in that early, there are two possible options for the borrower:

  • The lender allows you to continue making interest only payments over the new loan balance until the end of the 5th year;
  • Or, fully amortizing principal and interest payments will be required immediately for the remaining period of the loan, based on the new loan amount and current interest rate.

Given that the interest rate is likely to have risen, and keep rising, and that loan principal is higher anyways, it is likely that your monthly mortgage payment will triple after the recast. To avoid severe payment shock, many Option ARM loans have a 7.5% monthly payment increase cap accommodated in the loan structure.

The options described may vary slightly in your case, but this is what basically happens after a negative amortization recast.

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