What is 'Short Refinance'
Short refinance is a financial term that refers to the refinancing of a mortgage by a lender for a borrower currently in default on their mortgage payments. Lenders short refinance a mortgage in order to help a borrower avoid foreclosure. Typically, the new loan amount is less than the existing outstanding loan amount and the lender sometimes forgives the difference. Though the payment on the new loan will be lower, a lender sometimes short refinances because it is more cost effective than foreclosure proceedings.
BREAKING DOWN 'Short Refinance'
Short refinance is a financing solution some lenders choose to offer a borrower who is at risk of foreclosure. If a loan is in default, foreclosure is an expensive solution for a lender. When a lender begins the foreclosure process, the lender may not receive any payments for up to a year, and may lose out on fees associated with the procedure. A short refinance is just one of several alternatives that might be more cost effective for the lender. A short refinance also allows the borrower to keep the home. Other potential solutions are entering into a forbearance agreement or a deed in lieu of foreclosure.
When a borrower can’t pay on a mortgage...
When a borrower cannot pay their mortgage, a lender may be forced to foreclose on the home. A mortgage, one of the most common debt instruments, is a loan secured by the the collateral of specified real estate property that the borrower is obliged to pay back with a predetermined set of payments. Mortgages are used by individuals and businesses to make large real estate purchases without paying the entire value of the purchase up front. Over a period of many years, the borrower repays the loan, plus interest, until they eventually own the property free and clear. If the borrower stops paying the mortgage, the loan goes into default.
Once the loan is in default, the bank has a few options. Foreclosure is the most widely known and feared of the lender’s options. If the borrower cannot make principal and interest payments on their mortgage loan, and falls into default, if the lender chooses foreclosure they take control of the the property, evict the homeowner and sell the home. Foreclosure is a long legal process, which the lender might want to avoid. A lender may choose to short refinance, but another popular option is forbearance, a temporary postponement of mortgage payments. This is a form of repayment relief granted by the lender or creditor in lieu of forcing a property into foreclosure. The terms of a forbearance agreement are negotiated between the borrower and lender.