Recast, in this context, is a fancy way of saying recalculate. An even more fancy way of saying recalculate is to say reamortize. No matter how you say it, they all mean the same thing.

When a mortgage is recast, the lender works out a new amortization schedule, usually with the same interest rate, after the borrower has made a large payment on the loan to pay down the principal balance. Typically, this type of recasting can only occur once during the life of a loan.

Though it is possible for recasting to occur after someone comes into a large sum of money and pays down their home mortgage, it most frequently occurs when a borrower is in financial distress and needs to refinance to lower monthly payments. It works almost exactly like refinancing wherein the lender pays off the previous mortgage and re-issues a new loan for a lower amount, but there is a twist.The amount of the new loan is lower because the borrower must take a portion of the equity he got out of refinancing and put it towards the loan instead of a boat or remodeling or college tuition, making a significant payment of principal. So, the payments drop because there is a reduction in the principal amount owed, but they also drop because the amortization schedule has been lengthened to allow more time to pay the principal. If a mortgage is recast instead of refinanced, there are no closing costs and fees, usually just a small flat fee.

There is another context in which a loan is recast, and this is one to watch out for. There is a type of loan that has recently become quite popular, and it's called a "pick-a-pay" loan. You may have heard its technical name: negative amortization loan. The loan has become popular because it features a low minimum payment option, but it is really a trap for the unwary.

Pick-a-pay mortgages have "flexible" payment options, allowing the borrower to make a minimum payment (usually as low as 1%) or an interest only payment and to choose whether to amortize the loan mortgage over 30 years or 15 years. It's the 1% minimum payment that causes trouble (and just happens to be one of the most frequently-touted features).

Basically, what happens when a borrower elects to pay the minimum payment is that the borrower is paying less than the actual rate of interest on the loan, deferring a portion of the interest owed. The deferred portion is added to the balance of the loan, causing the overall size of the loan to grow because no principal is being paid down either. The interest grows until a limit is reached - usually 110 to 125% of the original loan balance. When the limit is reached, the borrower is no longer permitted to make the 1% minimum payment and the loan recasts itself with a new monthly payment that is usually much higher than the initial 1% payment. These loans usually recast themselves every five years.

When the loan is recast, the borrower is usually in a world of hurt for several reasons. These loans are typically marketed to people who can't acquire a conventional mortgage, meaning that they usually can't afford the monthly payments on the loan they've borrowed. Accordingly, when the size of the monthly payments increases, they can't afford that. When you further consider that the payment size has also increased because the size of the loan has increased (remember that deferred interest?) and that the interest rates on these loans are usually variable and could have increased over the course of the loan, you can see why it is that pick-a-pay loans are also called "pick-a foreclosure" loans.

So, while recasting a loan can work out well for a borrower, unless you have a large amount of cash in hand (or ready access to it), walk away when you hear about a recasting loan.

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