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What is Short-Refinancing?

A short-refinance is a loan agreed to by a lender for a borrower currently behind on their mortgage payments. The short-refinance (also known as a short payoff) is usually initiated to avoid foreclosure. In this situation, the new loan amount is typically set at the current market value of the home, which is often less than the existing loan amount. In most cases the lender forgives the difference between the new and old loan. A lender will often agree to a short-refinance in order to keep a borrower in the house, as it is generally more cost effective than proceeding with a foreclosure. However, if the market value of the house has dropped dramatically lower the amount still owed on the mortgage, the borrower should consider other loss mitigation options such as a loan modification.

A typical foreclosure can cost a lender $50,000 or more. Therefore, the foreclosure process is usually an undesirable solution for both the lender and the borrower. In the foreclosure process, the lender may be forced to maintain and sell the house, may not receive any payments for up to a year, and be forced to spend time and money associated with the legal aspects of carrying out a foreclosure. The foreclosure process also often ends with the borrower losing their home. With a short-refinance, the lender does lose out on a large sum of money and the borrower is able to keep their house. It is recommended that homeowners contact an experienced professional or real estate attorney before proceeding with a short-refinance request.