What is a short refinance?
A short refinance is a loss mitigation option in which your current lender agrees to refinance your mortgage into a new loan for less than the outstanding balance, effectively forgiving a portion of what you owe. It's less common than a modification or short sale, but for the right situation it can be a powerful way to make an underwater loan sustainable.
How it works:
- You demonstrate a hardship and that the current payment is unaffordable.
- The lender (or a new lender, with the existing lender's cooperation) issues a new loan for less than the payoff.
- The original lender forgives the difference, and you begin paying the new, lower-balance loan.
When it makes sense:
- You owe significantly more than the home is worth (underwater) and your income supports a reduced payment.
- You want to keep the home but the existing terms are unsustainable.
- A loan modification isn't available or doesn't reduce the payment enough.
Important caveats:
- Lender approval is required and not all servicers offer short refinances.
- Forgiven debt may be taxable — consult a tax advisor.
- It is distinct from a short sale, where the home is sold rather than refinanced.
Short refinance is one of several tools in the loss mitigation toolkit. It's worth asking your servicer about, but go in knowing it's less widely available than a modification or forbearance. For a broader look at relief programs, see navigating stimulus and state relief programs.
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