Using Short Refinance To Prevent Foreclosure

Posted on: 17 August 2016

If property prices have fallen in your area, you may find yourself in a situation where you owe more on your house than it is worth.  For example, you may buy a house for $700,000 only for its value to plummet to $620,000 after a few years and a mortgage balance of 650,000.

In this example, even if the lender opts for foreclosure, they aren't guaranteed of recouping their initial investment. In such a case, a short refinance becomes a viable option for both parties, a win-win situation.

What It Means

A short refinance is a negotiated agreement where the lender agrees to forgive part of the debt and the borrower pledges to repay the new mortgage balance. Using the above example, the lender may forgive $30,000 so that the homeowner only has to pay $620,000.

How You Gain

Apart from the obvious advantage of avoiding foreclosure and keeping your home, there are other advantages of a short refinances. Here are some examples of these advantages:

  • Lower monthly payments
  • Reduced interest rates
  • Possible equity on your home (if the lender forgives a sizable amount and your new balance is less than the current home value).

Possible Drawbacks

Unfortunately, there are a few things you need to worry about when it comes to short refinance; it's not all rosy. Here are some of the things you need to worry about:

  • The refinance will hurt your credit score since a portion of your loan is forgiven
  • The process is time consuming and not guaranteed to succeed. In fact, you may convince a lender (for the refinance) and still end up losing your home to foreclosure.

How to Get a Short Refinance

If you have considered all your options, and you still wish to go ahead with a short refinance, the first step is to find a lender willing to work with you. This is necessary since your current lender may not be necessarily willing to offer you the refinance. Once you find a suitable lender, inform your current lender of your intentions and negotiate a reasonable settlement.

Does this seem like something you might be interested in? If your answer is in the affirmative, you may need professional help to guide you through the process and the negotiations. A professional's input is important to ensure that you get everything right, from getting an accurate appraisal of the house to ensuring that your new mortgage rates are reasonable. For more information about your home's value, have a real estate appraisal done.