Refinance or short sale – Which should you opt for?

Refinancing is a program through which you can go on to save your home from foreclosure. Short sale too is another such program which helps you in avoiding foreclosure. However, in this case there’s a clear difference in between saving your home from foreclosure and avoiding foreclosure. Saving your home from foreclosure through refinancing can help retain your home. However, avoiding foreclosure through short sale won’t allow you to retain your home.

So, which would be the better option for you if you are soon to face a foreclosure – refinancing your home or short sale?

Refinance versus short sale

Refinance is the process through which you can retain your home, as as you need not fear defaulting on the loan payments. This is possible because, with refinancing you get to change the payment terms of the loan. You are actually required to obtain a new loan, which has better terms and conditions. In case of a refinancing loan, the interest rate can be low and you can also opt for a longer term. This is going to result in lowering the monthly payment amount.

On the other hand, short sale is mainly about selling off your home at a low price, only if the lender agrees to it. This is done only if the lender agrees to take less than what is owed by you on the loan. The best thing about short sale is that you get to sell the home to a buyer completely of your own discretion. Unlike foreclosure, where it is the lender who takes all the decisions, in case of short sale, once the lender agrees to it, you are the one to take the decision.

So, the main difference between refinancing and short sale is that in the previous one you can retain your home, but in the latter, you are going to lose your home. Therefore, if you are keen on retaining the home, it would be extremely important for you to opt for refinancing and not short sale. However, not all can be eligible for refinancing and that is because, your home can be underwater. Homes that do not have enough equity cannot be refinanced. You will not be eligible for a new home loan. In such a situation, you may not have any other option, but to opt for short sale.

Another reason as to why you need to opt for refinancing and not short sale is because short sale has a negative effect on your credit. Refinancing is not supposed to have any negative effect on your credit, as you will have to obtain the new loan before you can default on the previous one. On the other hand, short sale can lower your credit score by as much as 250 points.

Therefore, you will have to weigh the pros and cons of both the options and then decide which would be better for you. Nonetheless, simple considering the pros and cons wouldn’t do as the eligibility criteria is important too.