Refinancing When You are Underwater in Your Mortgage

underwater mortgageIt was about a year ago that my wife and I were contemplating whether or not to refinance our house considering the rates were so good. We didn’t end up going through with it for a variety of reasons – but are now, once again – considering a refi.

I was afraid we weren’t able to do it because we are somewhat underwater on the mortgage. We are fortunate we’re not as bad off as some are however.

Nearly 1 in every 4 homes in the US are considered “underwater” (the value of the home is worth less than the loan outstanding). And, in Las Vegas, Nevada it is 3 for every 5 homes! Things can always be worse.

That said, you can still refinance even if this is your predicament. Through the Federal Home Affordable Refinance Program (also called HARP), you can refinance on a loan that is 105 to as high as 125 percent of a home’s value. To qualify, here are some of the criteria:

  • Must have made 12 months of consecutive on-time payments to mortgage
  • Fannie or Freddie Mac must own loan

If you don’t meet HARP’s guidelines*, you may want to check out HAMP (Home Affordable Modification Program). This seems a bit more strict – but is suited for those who are really struggling to make their mortgage payment. Some qualifications are:

  • Need to demonstrate enough financial hardship to warrant a loan modification
  • Current monthly mortgage payment must be more than 31% of gross income

If none of these options work – and you’re really needing to refinance – you may want to talk with your mortgage holder. Given the past climate of defaults/foreclosures, banks seem more willing to work with folks to keep them in their homes.

Best way to go about finding if either are right for your underwater mortgage is to consult a mortgage pro. Find a good one who’ll put your interests first.

My mortgage professional has really taken the time to educate me on refinancing. They aren’t always the best option and you may not see the “return on investment” for years down the road (depending on how much the refi costs you).

The rates are certainly prime for refinancing though.

Have you recently refinanced an underwater home?

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4 comments

  1. I hope the HARP programs are a lot better than the HAMP (Home Affordable Modification Programs). I used to help sub prime consumers modify their mortgages, and it was a nightmare. You’d be surprised at how backwards some of these banks are!

  2. Gina says:

    We couldn’t qualify for HAMP because we ARE paying our mortgage on time. So now we’re paying down the second mortgage in an attempt to get out from underwater. Once we’re even with the house assessment, I’m going to try and refinance.

    • Aaron says:

      Hi Gina – Ironically, sometimes it seems those are not “following the rules” (paying on time) get more leniency than those who do (via HAMP).

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