How to Refinance a Home That Is Below What You Bought It For

Refinancing your mortgage can help you reduce your monthly mortgage payments.

The interest rate on your mortgage determines the cost of your mortgage. If interest rates drop and you are locked in a fixed-rate mortgage with high rates, you can save money by refinancing into a new mortgage with better terms. However, if you owe more on your mortgage than the current value of the property, also known as having an underwater mortgage, you will struggle to find a bank willing to invest in you. That is why the U.S. Department of Housing and Urban Development created the Federal Housing Administration's Short Refinance program.

Instructions

1. Visit the official website of the Making Home Affordable program. Click on programs and select "Lower Your Rates." Read the information on the Federal Housing Association's Short Refinance program and determine if you are eligible. Click on the "Find Out If You're Eligible" button, if you want a more detailed walk-through of the program's requirements.

2. Call 888-995-HOPE and request an interview with a free housing counselor approved by the Department of Housing and Urban Development. Your counselor will explain the requirements of the program in detail and spell out what your options are. For instance, to qualify for an FHA Short Refinance you must be current on your mortgage payments, use the property as your main residence and your total monthly loan payments cannot represent more than 55 percent of your monthly gross income. Counselors also help you negotiate better terms with your lender.

3. Apply for a FHA Short Refinance with your current lender. Although the Federal Housing Administration provides incentives to lenders that refinance the underwater mortgages of eligible borrowers, it is your lender who approves or rejects your application.

Tips & Warnings

• Expect tough negotiations with your lender before your application is approved. Lenders in this program must agree to reduce the mortgage principal to at least 97.75 percent of the property's current value.

• Mortgages owned by Fannie Mae, Freddie Mac, the U.S. Department of Agriculture or the Federal Housing Administration don't qualify for this program.

References

• MakingHomeAffordable.gov: FHA Refinance for Borrowers with Negative Equity
• HUD.gov; FHA Launches Short Refi Opportunity ...; Brian Sullivan; August 2010

Resources

• Freddie Mac: Mortgage Landscape
• The HUDdle: FHA's Short Refinance Option ...