when a payment is less than the interest charge at the time it creates deferred interest the amount of deferred interest created is added to the principal balance of the loan leading to a situation where the principal owed increases over time instead of decreasing due to this increasing principal negative amortization mortgages require that the loan is recast at some point so that it will be paid off by the end of its scheduled term 
negative amortization mortgages also sometimes have triggers that might cause an unscheduled recast to occur this may kick in for example if the principal balance of the loan reaches a set limit through negative amortization negative amortization mortgages are also known as payment option adjustable rate mortgages option arm these mortgages give borrowers options that include paying all of the principal and interest or paying only some of the interest while the choices available with an option arm allow for more flexibility on payments the borrower could easily end up with more long term debt than before as with other adjustable rate mortgages arms there is the possibility of interest rates changing drastically and rapidly based on the market 2example of a mortgage recasteven if a mortgage does not have a recast option included you can approach your lender to see if a mortgage recast will benefit you and lower your monthly payments by paying a lump sum and recasting your mortgage you can reduce your housing costs by contrast if you submit a lump sum without recasting you lower your balance but your monthly payments will remain the same let s say you have a 500 000 30 year fixed rate mortgage with a 4 interest rate your combined interest and principal payment would be around 2 400 per month in terms of principal and interest after tend years you receive a windfall lump sum of 375 000 if you decided to use that lump sum to pay down the mortgage without recasting it you would continue to pay around 2 400 a month but the length of the loan would become shorter as you are effectively paying down additional principal if on the other hand you recast the loan over the remaining 25 years of the mortgage the monthly payment would go down to around 900 per month in terms of principal and interest correction april 13 2022 a prior version of this article incorrectly calculated the recast monthly mortgage payment amount in the example 