How to calculate negative amortization home loan recast date, limit and payment?


For Option ARMs it is very necessary to know how to calculate negative amortization limit recast and payment change after the recast is triggered by reaching the neg am cap, or when the recast is scheduled.

You have to know your recast loan limit and period. The recast amount limit for negatively amortizing loans (Option ARMs in most cases) can be set anywhere from 105% to 125%.

If you have a Neg Am mortgage loan of $300,000 with 110% limit, the recast is triggered at $330,000. If by using the minimum payment option you are adding $700 to your loan principal the NegAm recast limit is calculated to reach in 43 months (30,000 / 700).

That is, if you have a standard 5- or 10-year recast period (60 or 120 months) and you only make 43 minimum payments and no payment to the principal at all, you will trigger a loan recast prematurely.

Your options after negative amortization mortgage recast is triggered are:

  • Monthly payment will adjust subject to a yearly cap (usually 7.5%) for the remaining months of the standard recast period and then fully amortizing payments for the new loan amount will become due.
  • Fully amortizing payments become due right after the recast. Most Pick-a-Pay ARMs have yearly cap on the monthly increase when recast is triggered early to avoid payment shock for the borrowers so this option is a little outdated. However, be warned that with those ARMs there is usually no lifetime cap.
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