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In this series, I detail six possible ways to deal with an “underwater” home—one that’s worth less than the amount of money owed on it. Here is the second part of my six-part series.

Option #2: Refinance

Homeowners who are underwater may be able to refinance into a low, fixed-rate loan under the Home Affordable Refinance Program (HARP). The program, which was slated to expire this summer, has been extended through June 2012. For those who qualify, the terms are similar to those of any other conventional loan, but without the steep mortgage insurance that is typically required when there is less than 20% equity in the home.

“We’re still seeing a steady demand for these loans from homeowners whose equity has dried up,” says Joe Kelly, president of YouCanRefi.com, which specializes in HARP loans. “With rates so low right now, some homeowners can cut their monthly payments significantly,” he notes, “and that may allow them to keep their homes.”

HARP is available for loans owned by Fannie Mae or Freddie Mac. To refinance under HARP you don’t need to work with your current lender, but it is helpful to work with a mortgage lender that has expertise in the nuances of the program, advises Kelly. Find out if you qualify at YouCanRefi.com.

If your mortgage loan is a “portfolio” loan still owned by your lender, you won’t be able to refinance under HARP, but you may able to work with your lender directly. That’s what the Kendall family did. (Their name has been changed.) They purchased their home for $329,000 and it was worth about $181,000 when they approached their credit union to lower the 6.25% interest rate. A loan officer at the credit union told Ben he might be able to refinance under HARP, but he wasn’t eligible because his loan wasn’t owned by Fannie. “I told them to sell my loan, but they wouldn’t because I was paying and it was a good loan,” he muses.

But Ben Kendall wouldn’t take no for an answer. An email to the president of the credit union snagged the couple a 15-year loan at 4.5%. “Within a few weeks we had tripled the amount of principal we were paying, making the most of a bad situation,” he says.

Of course, it took a little arm-twisting to get there. Kendall made it clear there was no hardship, but also told the credit union they would stop paying if they couldn’t strike a deal. “Underwater homeowners need to act stupid to be smart financially these days,” he says.

According to the HUD June 2011 Housing Scorecard, some 10.6 million homeowners have refinanced since April 2009, though most of those homes were not likely upside down.

If you are able to refinance, there should be no damage to your credit rating. You’re just paying off one loan and getting a new one. But, like staying and paying, you may still be at risk of losing your home if your income drops and you can’t keep up with your payments. And if you need to sell for some reason (job relocation or divorce, for example) you may find yourself forced to consider more drastic options.

Other options for homeowners with “underwater” mortgages:

  1. Underwater On Your Home Option 1: Stay and Pay
  2. Underwater On Your Home Option 2: Refinance
  3. Underwater On Your Home Option 3: Get a Loan Modification
  4. Underwater On Your Home Option 4: Short Sale
  5. Underwater On Your Home Option 5: Walk Away / Foreclosure
  6. Underwater On Your Home Option 6: Bankruptcy

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  • Lisa Boeke

    I owed 150,000.00 on a house worth 250,000.00 i lost my job and did a loan modification. they played games for a year and constantly claimed they didnt receive requested paper work. then they said ok my payments would be interest free for a certain amount of time. but now I owe an additional 130,000.00 added to my original 150;000.00 because of the time it took to process now i am under water now what ?

    • ScottSheldonLoans

      I would talk to a real estate attorney in your area. Perhaps even consulting with a bankruptcy attorney, an attorney that is skilled in the areas of debt collection. I think a professional who has the capacity to properly advise would be in your best interest to at least explore.

  • James

    I am in an a interest only loan at $4000,000. my home value is worth $350,000.
    I do not qualify for the harp program, with excellant credit i cant seem to be able to lower my rate, which is currently 7.5%. Can any one help

    • Gerri Detweiler

      James – There are no easy answers for those who are underwater and don’t qualify for HARP. Do you live in California or Arizona by chance? If so you may want to check out this program: The New Solution to Getting Your Home Above Water

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  • Greg Brown

    Has anyone had any luck working with HSBC Mortgage. We have two mortgaes, First is 200,000 and second is 50,000. Value of homes in our area tanked to around 200,000. Our monthly payments total $2000.00 and with cost of living increased and job pay not increasing etc, we are attempting to lower payments to a better rate. We are not late on payments and HSBC will ONLY assist if we are late and ruin our credit.

    • Michelle

      I am in the same situation. I have an HSBC mortgage in which I owe much more than my home is worth. There are NO MORE HSBC branches and the phone help is minimal. We are not late on payments either. I do not know if HSBC is part of the home loan settlement which requires lenders to work with those who are current on payments, but underwater. I have been trying to find out. Anyone know?

  • Rick

    Hi Gerri,
    Thank you so much for gettin back to me. Yes, I went through the whole refinance process with another lender with the intetion of falling back to the HARP program if the appraisal came back low. Well, what do you know it did. Then they informed me of this info that I wanted to pass along so someone does NOT make the same mistake I did and pay $400.00 for an appraisal that will do you any good. The following is info from the HARP website… Interest rates and closing costs may vary from one lender to another and from one day to the next. If you have a Freddie Mac loan, you must refinance with your current lender. If you have a Fannie Mae loan, you can shop around for the best deal, as long as you choose another Fannie Mae approved lender.

    • Gerri Detweiler


      I checked with Joe Kelly, at YouCanRefi.com who has been doing HARP loans since the program first came out. He said: “In 2009 when the program first came out this was true. But that changed in 2010. There are not as many Freddie approved lenders as there are Fannie. But we are and there are many out there.”

      Hope that helps!

  • Rick

    This statement is incorrect: “HARP is available for loans owned by Fannie Mae or Freddie Mac. To refinance under HARP you don’t need to work with your current lender.” – I am with Chase and have a Freddie Mac loan. I went through the procces with another lender, forms, paid for an appraisal, etc. Then at the end I was told you cannot go with us because it is a Freddie Mac loan. But they Said Fannie Mae would be no problem. I have no control over this and should not be penalized by having to pay a higher interest rate through my current lender.

    • Gerri Detweiler


      I am not sure what happened here but the guidelines clearly state the loan must be owned by Freddie or Fannie. And I don’t think they should have had you pay for an appraisal if they couldn’t do the loan. Have you talked with another lender?

  • http://806-801-8582 Xavier Alfaro

    On my first Mortgage I owe $280,000,on my second (HELOC) I owe $77,000.
    The value of my home would be between $280,00 and $300,000.
    My gross pay is close $100,000 per year, take home $5,000.

    I havetried to refinance through the bank that I have the loan with and I they indicated since I’m underwate I do not qualify to refinance. They also rejected converting my 30 year fixed loan to a 15 year loan at 3.75%.

    Can you give me advise on what to do to reduce my payments.

  • http://credit.comnews/advice Carol

    –1st MTG.—$183,000 2ndMTg—$42,000 Value of House approximately $165,000

    • http://www.Credit.com Gerri Detweiler


      It is possible you may qualify for HARP to refinance the first mortgage. You can visit YouCanRefi.com to find out if you qualify.

      Also, rather than rely on your lender for details on what you can and cannot do, you may want to talk with a housing counseling agency. Their services are free and they often have access to a lot more information and programs than even lenders/servicers. (Many lenders/servicers are understaffed and use a lot of temporary or undertrained workers who really aren’t qualified to give you all the information you need to make a good decision.) You can visit EndYourDebt.org or any HUD approved housing counseling agency for assistance.

      A third option is to talk with a bankruptcy attorney who may be able to “strip” the second mortgage since it’s essentially unsecured at this point. Sometimes bankruptcy attorneys can help with a modification in conjunction with a Chapter 13 bankruptcy. It doesn’t hurt to check.

      Will you let me know what happens after you check out these options?

  • http://credit.comnews/advice Carol

    We are upside on our mtg. We have never missed a payment or been late. Our mtg. was bought by BofA last fall (2010). We were told that we did not qualify for any modifications, gov’t programs, etc. Surely, there is some way we can refinance from a 7.5%. It seems we are being punished for having good credit & paying on time. Please help, if possible.

    • http://www.Credit.com Gerri Detweiler

      Carol – How much do you owe (first and second, if there is one) and how much is your home worth?

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