A short refinance allows you to change your home loan to one that’s less than what you owe on the property and may be more desirable for lenders than going through a foreclosure process.
A short refinance is a mortgage refinancing option to help borrowers struggling with mortgage payments. A short refinance can be a lifeline if you want to remain in your home and avoid foreclosure. It's especially valuable to borrowers if their homes have dropped in market value. Half the battle, however, is finding a lender who will give you one, as it requires them to forgive thousands of dollars in debt.
Read on to understand how a short refinance works and weigh the additional financial implications.
- What is a Short Refinance?
- Pros
- Cons
- See All 15 Items
What is a Short Refinance?
A short refinance is a mortgage refinance option offered by some lenders that allows you to replace your existing home loan with one that’s less than what you owe. It can help borrowers with negative equity in their home or who are struggling to pay the mortgage each month to secure a lower mortgage amount and payment requirements.
“Here’s the catch: Your lender has to agree to cut your loan balance, and not all lenders are willing to do that,” says real estate investor Martin Boonzaayer, CEO of The Trusted Home Buyer.
If the lender you worked with for your mortgage is unwilling to participate, you can check our list of the best refinance lenders to see if one will work with you.
Pros
- Get a manageable monthly payment: With a short refinance, you could lengthen the term or reduce the monthly costs, making payments easier to fit into your budget.
- Lower loan balance: If part of your mortgage is forgiven, the remaining balance may be more manageable.
- Avoid foreclosure: A short refinance can help you avoid losing your home.
Cons
- Credit score: A short refinance typically lowers your credit score, although not as much as a foreclosure.
- Tax costs: Any forgiven debt is considered taxable income, and you must pay the relevant income tax.
- Not a total solution: If you're struggling to make mortgage payments, even a reduced payment may not be affordable.
How Does a Short Refinance Work?
A short refinance occurs when a mortgage lender refinances a mortgage for less than what the borrower owes. The lender might opt for a short refinance if you are behind on mortgage payments and at risk of foreclosure.
With home mortgages, the home itself usually serves as collateral. If a borrower fails to pay, a lender could repossess the property and sell it to recoup its costs. This process is called foreclosure, but it’s not ideal for either the lender or the borrower.
A lender might be willing to offer a short refinance to avoid the lengthy and costly foreclosure process. This is a win for both the borrower and the lender. The lender gets payments while forgiving some portion of the loan.
Keep in mind, a short refinance can hurt your credit score, and there may be tax implications.
Example of a Short Refinance
Suppose you have a mortgage with an outstanding principal balance of $250,000. Your monthly mortgage payments are $1,500, and the loan term has 20 years remaining. The lender may be concerned about foreclosure if you've missed multiple payments.
If, in addition, your home's market value has decreased from $270,000 to $230,000, the lender might allow you to take out a new loan for the current value of $230,000 and forgive the $20,000 difference between the original mortgage and the new loan amount ($250,000 – $230,000).
In that case, they may agree to a short refinance for $230,000, with a loan term of 30 years, lowering your monthly payments and the total owed.
Short Refinance Alternatives
Here are some common alternatives to a short refinance you can consider:
Rate-and-Term Refinance
A rate-and-term refinance allows you to replace your mortgage loan with a new loan with a different interest rate or term without advancing additional cash. You might choose a rate-and-term refinance if mortgage interest rates have decreased or if you could secure a lower interest rate.
Forbearance Agreement
A forbearance agreement is negotiated directly with the lender. This temporary postponement of mortgage payments could give you time to get back on your feet and start making mortgage payments.
Deed in Lieu of Foreclosure
A deed in lieu of foreclosure is another alternative that requires you to give up the property with a deed back to the lender. In exchange for the deed in lieu of foreclosure, you'll be released from the obligation of paying the mortgage. However, you'll lose the property, so a short refinance could be a better option.
Loan Modification
A loan modification is typically granted to a borrower in a financial crisis. The lender makes these modifications, which could include a reduction in the interest rate, an extended repayment term, or a different type of loan. To get a loan modification, you may need a legal representative or access to a government program that supports mortgage holders.
Short Sale
You can consider a short sale as an alternative to a short refinance. In that case, you can sell the home for less than the mortgage is owed. The lender will collect the proceeds from the sale and then forgive the difference. In some cases, they will get a deficiency judgment requiring you to pay the leftover amount.
Is a Short Refinance a Good Idea?
- With a short refinance, your lender may forgive part of your loan and allow you to remain in the property
- Lenders may prefer a short refinance instead of the lengthy, expensive foreclosure process
- A short refinance can hurt your credit score, and there may be tax implications
- Depending on the equity you have in the home, you can also consider other refinance options
Why You Should Trust Us
Benzinga has offered investment and mortgage advice to more than one million people. Our experts include financial professionals and homeowners, such as Anthony O’Reilly, the writer of this piece. Anthony is a former journalist who’s won awards for his New York City economy coverage. He’s navigated tricky real estate markets in New York, Northern Virginia and North Carolina.
For this story, we worked with real estate investor Martin Boonzaayer, CEO of The Trusted Home Buyer.
Frequently Asked Questions
What is short-term refinance?
A short-term refinance is a refinancing option in which a lender forgives a portion of a homeowner’s mortgage and allows them to refinance to a home loan that’s less than what they owe on the house. This type of refinancing is not available at every lender.
Will a short refinance hurt my credit score?
Yes, a short refinance can affect your credit score. Any refinancing can affect your credit score for up to one year and remain on your credit report for up to two years. To protect your score, make on-time payments to avoid additional negative marks.
What is an FHA short refinance?
An FHA short refinance was a government program that allowed homeowners with an FHA loan to refinance to a conventional loan that’s worth less than what they owed. The program launched in 2010 and eventually ended in 2014.
Sources
- Martin Boonzaayer, CEO of The Trusted Home Buyer
About Anthony O'Reilly
Anthony O’Reilly is an updates editor for Benzinga. He’s won numerous journalism awards for his coverage of the New York City economy and Long Island school district budgets.