Bankruptcy

Short Refinancing

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A hybrid tool that is generally used to avoid foreclosure is a called a short finance. This term refers to both refinancing and modifying a loan, while discharging the value of debt, which makes a homeowner ?upside down?. This tool allows homeowners to refinance their loans, but with some of the debt forgiven. Essentially, if a mortgage on a home exceeds the fair market value of that home, homeowners can now though their attorney negotiate with the lien holder to forgive the debt in excess of what a home could reasonably sell for in today?s market.

Short Sale refinancing is similar to stripping a lien. The difference is that in lien stripping, the entire loan can be discharged, but only if the fair market value of a senior lien ?eats up? the value of the secured property. Through a short sale refinance program, a homeowner can partially strip a lien, whether or not there is another lien senior to it.

For example: You owe $225,000 on a condominium that you purchased at the peak of the real estate market in 2001. Over the course of seven years, you have paid off $10,000 in principal. As such, the current value of your principal is $215,000. Subsequently, home values have declined by 15%, and your home is now worth $190,000. The rate on your subprime mortgage has increased, and you can’t afford the higher payments. Rather then foreclosing, the mortgage company agrees to discharge $25,000 of the debt and refinances the mortgage for $190,000 for the next 30 years. This is a loan you can afford as a result of forgiveness of debt coupled extending the time to pay the loan.

Full post as published by Bankruptcy Articles & Blog on November 22, 2008 (boomark / email).