What is a short refinance?
Updated October 16, 2024, 2:47 AM EDT
If you're struggling to make your mortgage payment and want to avoid the possibility of a foreclosure, your lender may agree to a short refinance. This is similar to a standard refinance, in that you're replacing your current mortgage loan with a new one. But the primary goal is to help you stay in the home and minimize financial losses for your lender.
What is a short refinance?
A short refinance is a refinancing arrangement that serves a specific purpose: to help you avoid losing your home.
If you default on your mortgage for any reason and fall behind on your loan payments, a short refinance is something your lender might consider in lieu of a short sale or foreclosure. This type of refinancing pays off your existing home loan for less than what's owed.
A short refinance isn't the same as a cash-out refinance or a traditional refinance loan. You can't use it to tap into your home's equity, for example. And a short refinance can be more difficult to obtain than a regular refinance loan since it requires a willing lender.
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How does a short refinance work?
When a lender offers a mortgage to a homebuyer, they're making an investment. The main risk is that the buyer will default on loan payments later.
In that scenario, homeowners can pursue a short sale to get out of the mortgage. Or the lender can initiate foreclosure proceedings. Either way, the homeowner wouldn't be able to keep the home. If a lender is interested in helping a borrower to stay in their home, they can agree to a short refinance instead.
You can ask your current mortgage lender for a refinance loan that's less than what you owe, or seek out short refinancing from a different lender. Once you're approved for a short refinance, your old loan is paid off and you make payments to the new loan going forward.
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What is the benefit of a short refinance?
A short refinance can benefit you and your lender in different ways. As a homeowner, the biggest advantage of a short refinance is being able to stay in your home. Beyond that, however, there are some financial benefits, including:
- Reducing the total amount you owe
- Reducing your loan balance, interest rate and monthly payments
1. Reducing the total amount you owe: If you started off with a $200,000 mortgage and you refinance into a $150,000 mortgage, that's $50,000 you wouldn't have to pay back. If mortgage rates have dropped, that could translate to a lower interest rate on the new loan.
2. Reducing your loan balance, interest rate and monthly payments: This can help make your mortgage more affordable so you're less likely to default. Just keep in mind that you may have to pay closing costs for a short refinance the way you would with any other refinance loan.
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How does a short refinance affect your credit?
There are some potential drawbacks to a short refinance, particularly where your credit is concerned. You may see a negative credit score impact, for example, if your old mortgage is listed as "settled as agreed" rather than "paid in full" on your credit reports. Remember also that your lender has to agree to a short refinance and even then, approval isn't guaranteed.
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What are the other foreclosure options?
If a foreclosure is potentially looming and your lender isn't open to the idea of a short refinance, there are other options you might consider. What you choose depends on whether you want to remain in the home.
A short sale or deed in lieu of foreclosure, for example, would allow you to get out of your mortgage obligation. A short sale involves selling the home for less than what it's worth and a deed in lieu means you give the home back to the bank in exchange for being released from the mortgage.
If you'd like to stay in the home, then you could ask your lender about other options, such as a temporary forbearance on payments or a loan modification. Forbearance periods let you take a temporary break from making payments while a modification means the lender agrees to new loan terms.