How to Refinance if You’re Underwater

Now is a great time to refinance that home mortgage before rates start going up. You’ve probably seen the reports about the increase in home sales and prices, and you know that mortgage rates can’t stay this low forever. But what if you are underwater – owe more on your home than it is worth? While it may be harder to get a refinance loan, it’s not impossible.

There are two options under the Making Home Affordable program created by the government for people who are underwater on their loan.


The Home Affordable Refinance Program, or HARP, allows homeowners to refinance even if their ratio is at 105 to 125 percent of the home’s value. Not everyone qualifies for this program though. You cannot be moving towards foreclosure or have been delinquent on any loan payments in the last 12 months. The loan must also be owned either by Freddie Mac or Fannie Mae.

Once those two criteria have been met, the lender will have to look at your payment history and credit score along with the structure of the current loan and specific guidelines for lenders. It is worth looking into if it can cut your payments by a few hundred dollars.


The second option, called HAMP (Home Affordable Modification Program), is for people who have missed some payments. For this program, you have to prove financial hardship that is serious enough to cause you to lose your home. Like HARP, you must have a loan owned by Fannie Mae or Freddie Mac, or one of the other programs that have signed up with the government to participate.

While this option is not a traditional refinance program, it does modify your payments for up to 60 months. After that time is up, your rates will go up one percentage point every year until it maxes out at the rate prevalent at the time of modification.

There are several ways a lender could modify your mortgage. They may extend it for a longer term, change to a lower interest rate, or even forgive some of the principal balance on the loan.

To qualify for the loan program, you must have a payment that is over 31 percent of your gross income, be able to show you have problems making the payments, and the home must be your primary residence. There are also income limits with this program.

If you do not qualify for either of these options, don’t assume it’s hopeless. Talk to your lender and discuss the possibility of refinancing. Many lenders are willing to work with you even if the program is not backed by the government. Lenders don’t want the hassle of a foreclosure if they can get the payment from you, even in the form of a modification.

Even if you are underwater on your mortgage, there are options for refinancing. You just have to work a little harder to find them.

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