A short refinance is a tool that is sometimes employed to prevent foreclosure after a debtor has defaulted on payments associated with a mortgage. Generally, the original lender extends the short refinance in an effort to minimize the amount of loss that would occur on the transaction if the foreclosure took place. While a short refinance may have some impact on the debtor’s credit rating, the end result will not be as harmful as allowing the mortgage to go into a foreclosure situation.
While lenders do lose money on a short refinance, the process does help to avoid many of the costly and inconvenient issues that surround a foreclosure. Depending on the laws governing the issuance of mortgages that apply, the lender may be unable to realize any payments whatsoever for anywhere from six months to a year after the foreclosure takes place. In addition, there are usually legal and other fees involved in the initiation and execution of a foreclosure that further erode any gains the lender would receive at the end of the process.
For reasons like these, lenders sometimes look for ways to avoid foreclosure and attempt to work with the debtor. A short refinance often is the most cost-effective way to minimize losses and maintain a steady flow of revenue from the mortgage arrangement. While the total refinance amount of the transaction may be less than what is actually owed on the mortgage, the lender usually forgives the difference. Often, that difference represents interest only and the debtor still ends up paying any remaining principal that is carried over to the new finance situation.
Debtors also benefit from the issuance of a short refinance. Foreclosures tend to create a bad credit rating, making it difficult for the debtor to secure financing on other items or to command desirable interest rates on credit cards. While the refinance situation may have some impact on the equity of the property, this is usually negligible. In any event the small liabilities to the debtor are outweighed by the benefits of using a short refinance rather than allowing the default to escalate into a foreclosure.