Short-term refinancing can prevent foreclosure and minimize losses for lenders. It may impact a borrower’s creditworthiness, but is less damaging than foreclosure. Lenders forgive the difference between the total transaction amount and what is owed, and debtors benefit from avoiding a bad credit rating.
A short-term refinance is a tool that is sometimes used to prevent foreclosure after a debtor defaults on payments associated with a mortgage. Generally, the original lender extends the short refinance in an effort to minimize the size of the loss that would occur on the transaction in the event of a foreclosure. While a short-term refinance may have some impact on a borrower’s creditworthiness, the end result won’t be as damaging as allowing the mortgage to enter a foreclosure situation.
While lenders lose money on a quick refinance, the process helps avoid many of the costly and inconvenient issues surrounding a foreclosure. Depending on the mortgage issuance laws that apply, the lender may not be able to make any payments for six months to a year after closing. Additionally, there are usually legal and other fees involved in initiating and enforcing 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 quick refinance is often the most cost-effective way to minimize your losses and maintain a steady stream of income from your mortgage deal. While the total refinance transaction amount may be less than what you actually owe on the mortgage, the lender usually forgives the difference. Often, this difference represents interest only, and the debtor still ends up paying any outstanding principal carried forward in the new financial situation.
Debtors also benefit from the issuance of short-term refinancing. Foreclosures tend to create a bad credit rating, making it difficult for the debtor to get finance on other items or charge desirable interest rates on credit cards. While your refinancing situation can impact the equity of the property, it is usually negligible. In any case, the small liabilities to the borrower are offset by the benefits of using short-term refinancing rather than default turning into foreclosure.
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