An Option ARM recast can occur for two reasons. One is when the negative amortization cap is reached; the other - when the loan is scheduled to re-amortize after 5 or 10 years.
If you are borrowing with Option ARM at 80% LTV, the loan recalculation may occur if 85% LTV is reached. Typically, loans with LTV higher than 80% require PMI, and the Option ARM agreement may include acceleration clause for loan recalculation at 85% of house value or appraisal to include private mortgage insurance payment.
Often, the Option ARM recast kicks in if 110 or 125% of the original loan balance is reached, due to making only minimum payments.
If the negative amortization cap is not reached prematurely, the Option ARM loan balance will be recast after preset number of years - usually 5 or 10. At that time, payment options will be cancelled and the borrower will have to make fully amortizing payments. In case of a Hybrid Option ARM, after the recast sometimes it is possible for borrowers to make interest-only payments for some more time instead of the fully amortizing payments.