A borrower who is currently behind on their mortgage payments may be eligible for a short refinance, which is a term used in finance to describe the process by which a lender will refinance an existing mortgage for such a borrower. A short refinance of a mortgage is performed by lenders in order to assist borrowers in staying out of foreclosure.

What Is a Short Refinance?

In most cases, the total amount of the new loan is less than the total amount still owed on the previous loan, and the lender may in some cases waive the difference. Even though the monthly payment on the new loan will be lower, a lender will sometimes choose a short refinance rather than going through the foreclosure process because it is more cost-effective.

A short refinance can have a negative impact on a borrower's credit, but so can late or missed mortgage payments. A lender may choose to offer a short refinance to a borrower rather than going through the time-consuming and costly process of foreclosure.

Both a forbearance agreement and a deed in lieu of foreclosure are options that lenders might look into if they believe that these alternatives will save them money.

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How a Short Refinance Can Benefit You

If a borrower is unable to keep up with their mortgage payments, the lending institution may be forced to foreclose on the property. A mortgage is a loan that is secured by the collateral of a particular piece of real estate property and that the borrower is obligated to pay back with a predetermined set of payments. A mortgage is one of the most common forms of debt instruments and is a loan. Mortgages allow individuals and businesses to make substantial real estate acquisitions without having to pay the full value of the purchase up front by spreading out their payments over time. The debt is paid back by the borrower, along with any accrued interest, over the course of a number of years, until the borrower finally owns the property outright.

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When a borrower is unable to keep up with their mortgage payments, the loan is considered to be in default. When this occurs, the bank will have a few different options available to it. The most well-known and dreaded of the choices available to the lender is the foreclosure, which involves the lender seizing control of the property, forcing the homeowner out of the house, and then selling the house. It is possible that the lender will not receive any payments for up to one year after the foreclosure process has been initiated, and the lender will also lose out on fees associated with the procedure. Therefore, the lender may want to avoid the foreclosure process because it is a lengthy and expensive legal process.

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A borrower who is in danger of losing their home to foreclosure may be able to receive assistance from their lender in the form of a short refinance. A borrower also has the option of requesting a short refinance. There are benefits that accrue to the borrower as well: They are able to keep the house thanks to a short refinance, which also brings down the total amount that is owed on the property. Because the borrower is not paying the full amount of the original mortgage, their credit score is likely to drop, which is a negative aspect of the situation. Unfortunately, this is also a downside of the situation.

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 Short Refinance vs. Other Foreclosure Options

One of the many alternatives to foreclosure that could be more cost-effective for the lender is a short refinance. This alternative is just one of several. The entry into a forbearance agreement, which is a temporary postponement of mortgage payments, is yet another potential solution to the problem. The borrower and the lender work together to negotiate the terms of a forbearance agreement before the agreement is finalized.

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Deeds in lieu of foreclosure are another option that a lender has. This type of foreclosure requires the borrower to deed the property that was used as collateral back to the lender. In essence, the borrower is giving up the property in exchange for being released from the obligation of continuing to make payments on the mortgage.

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Example of a Short Refinance

Consider the following scenario: the value of your home fell from $250,000 to $210,000 while you still owe $230,000 on the property. During a short refinance, the lending institution would permit you to obtain a new loan in the amount of $150,000, and you would not be required to pay back the difference of $20,000.

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Not only would you have a lower principal, but it is highly likely that your monthly payments would be lower as well, which would make it easier for you to afford them. You may have a win-win situation for you.