What Is a Short Refinance
A short refinance is when your mortgage lender agrees to accept less money than you currently owe on your mortgage. This type of refinance can be done through your current lender or a completely different lender; the refinance pays off your current lender.
Must Be Approved
A short refinance isn't guaranteed to be approved just by asking. Your lender must agree to take less money than it is currently owed and allow you to keep the home. Generally, this requires the lender to determine the reason you fell behind on your payments. But, it's usually in the lender's best interest to reduce the amount you owe because by doing so, it will receive more money in the long run than it would if it foreclosed on the home, says Bankrate.com.
Benefits of a Short Refinance
The biggest benefit to a short refinance is that you get to reduce the amount you owe on your mortgage. For example, if the fair market value of your home has plummeted from $150,000 to $100,000, and your lender lets you refinance your $130,000 mortgage to $100,000, that's $30,000 you don't have to pay back. Along with the reduced mortgage amount generally comes lower monthly payments that may allow you to make payments more easily each month.
Credit Score Impact
Usually, your credit score will take a hit because you're not paying the full amount of your mortgage when you refinance. According to Trulia, your credit report will often show the debt as "settled as agreed," which can drop your credit score 20 to 40 points. However, that's on top of other damage to your credit report caused by you being late with payments, or missing payments altogether.
Foreclosure More Likely
If you've fallen behind on your payments, it is more likely that the lender will foreclose on your home or allow you to surrender the deed to your home and move out instead of forcing the bank to go through the foreclosure process, says Bankrate.com. If that is the case, consider seeing if the bank will accept a short sale, in which the bank takes the proceeds of the sale -- even though they are less than what you owe -- and considers it payment in full for your mortgage debt. That way, the lender agrees not to pursue you for any remaining balance you owe.