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To recast a loan means to recalculate an amortization schedule with the remaining loan balance.
Two common events often trigger recasting.
Adjustable rate mortgage
Because interest rates vary when a borrower is on an ARM, when interest rates spike suddenly, the is a strong chance that interest charges increase while the monthly payments remain the same.
This results in deferred interest and thus, negative amortization.
Letting the unpaid interest accumulate and accrue can be unfavorable to the borrower.
By recasting a home loan, the lender uses the current loan balance to work out a new payment amount so that the borrower will not continue to accrue interest.
Recast clauses are often found in loan contracts that give lenders the right to recast should certain conditions be met.
Lump sum payment
Sometimes when a borrower receives a sudden windfall and has no idea on how to spend it, using it to partially pay off the mortgage sound like a really good idea.
If you are not an investor and have little opportunities to invest at 10% ROI, using the funds to repay a 5% home loan is as good as making 5% on it.
Due to a borrower making a lump sum payment towards redeeming the mortgage, a new monthly payment amount can be calculated.
Alternatively the borrower can also choose not to recast the loan, keep repaying the original payment amount, and have the mortgage reach zero balance sooner than it initially would.
However, whether the borrower has a choice might depend on the terms that a lender has inserted into the loan contract.
Lenders usually prefer that the original tenure is retained and mortgage recast.
This is because the longer a borrower keeps a loan, the more interest they would make from him.
Finally, be mindful that recasting is different from refinancing.
Refinancing is replacing an existing loan with a new one. While recasting retains an existing loan but recalculates the monthly debt obligations.