Question:

What is a recast clause for an Option ARM home loan?

Answer:

The recast clause for an Option ARM home loan simply states that your mortgage loan will require either

  • fully amortizing principal and interest payment once the recast limit is reached;
  • or, interest only payment, until the minimum payment period is over.

Most deferred interest home loans (that is, negative amortization mortgage loans) have the recast limit set at 110%. The federal and state mortgage loan recast limit is set at 125%.

Option ARM Recast Clause Structure

The Option ARM loan usually is taken with a 30 year term and allows for minimum payment and/or interest only payments for limited time - 5 to 10 years. When this period is over, or the loan recast limit is reached prematurely, the loan balance is recalculated and fully amortizing payments of principal and interest kick in for the remaining loan term.

The flexible payment options with an Option ARM loan allow for

  1. minimum payment as low as 1-1.25%;
  2. interest-only payment;
  3. fully amortizing payment for 15 or 30-year terms.

Negative amortization occurs when you are making only the minimum payment. The difference between the minimum and interest-only payment will be added to the principal until the recast limit is reached.

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