The unscheduled recalculation of the remaining amortization schedule of a loan. The recalculation occurs when certain triggers contained in the contractual terms of the loan are reached. This might lead to a substantial increase in the loan’s scheduled periodic payments.
Investopedia Says:
Payment option ARMs typically have contractual triggers which will cause an unscheduled recast of the mortgage. These triggers are in the form of a negative amortization limit. Negative amortization on such mortgages is limited to between 110% and 125% of the loan’s original principal balance. For example, if the mortgage’s principal balance reaches 110% of the original principal balance due to negative amortization, the loan will recast. This presents a great deal of payment shock risk to the borrower.
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