7 Secrets to Refinancing an Underwater Mortgage

By Julie Rains on 15 November 2012 (Updated 22 August 2013) 9 comments
Photo: 401(K)2012

If you pay your mortgage on time, you may be able to refinance even if you are among the approximately 22% of mortgage holders in the U.S. who are underwater, have been turned down by multiple lenders, and heard that you don't qualify for a new loan.

Recently, I spoke with underwater borrowers who have refinanced, one through a government program and another through his current lender. Their combined savings exceeded $800 per month, which may encourage anyone who is underwater to try and try again to snag a better mortgage deal.

Brush off rejections, and learn these secrets to save yourself tens of thousands of dollars in interest. (See also: 6 Options If You're Underwater on Your Mortgage)

1. You May Be Eligible Now, Even if You Didn’t Qualify Before

Super-strict guidelines for refinancing underwater mortgages (for those who are current on their payments) have been loosened. So, you may be eligible for the new-and-improved HARP (government-sponsored Home Affordable Refinance Program), which has been nicknamed HARP 2.0.

A big change that has helped people is the revision of the LTV (Loan to Value) requirement. Before, this ratio could not exceed 125%; now, you can be seriously underwater and still be able to refinance.

For example, you couldn’t owe more than $250,000 on a home valued at $200,000 (250,000/200,000=125%) under original guidelines. Now, your balance could be $275,000, and you could still be eligible to refinance your mortgage.

2. Educate Yourself Without Driving Yourself Crazy

Trying to decipher the terminology and rules of all of the government programs is mind-boggling. Still, you might want to learn the basics by visiting the federal government’s website Making Home Affordable. If you want to refinance your underwater mortgage AND you are current on your mortgage payments, then the Lower Interest Rates section is relevant to you.

Real estate website Zillow also offers information on refinancing for those with underwater mortgages. Use its flowchart to identify options among various programs that fit your situation and the HARP Eligibility Calculator to determine if you are eligible for that program.

The government resources that are relevant to those who are underwater but current on their mortgage include:

Determine what entity backs your loan in order to identify the specific program for which you may be eligible. Mortgage loans that are owned, guaranteed, or backed by Freddie Mac and Fannie Mae might qualify for refinancing through the HARP program; the majority of loans fall under this category. Otherwise, if you have an FHA loan, then you should check out the FHA Streamline Refinance; USDA loan, the USDA Rural Refinance Pilot (a pilot program) in selected states; or VA loan, the IRRRL.

If you are confused, overwhelmed, or just don’t have time to sift through all this information, Erin Lantz, Mortgage Director at Zillow, recommends that you call your mortgage servicer. Ask what entity backs your mortgage in order to figure out what program, if any, for which you may be eligible.

3. Understand That Not All Lenders Use the Same Guidelines

This secret is the trickiest nuance of all. Lenders may have requirements that are more stringent than the eligibility criteria listed by the federal government on its Making Home Affordable website.

Such a situation seems to be like applying for college. Colleges and universities typically require that you are a high school graduate or hold an equivalency diploma (GED) to be admitted. But they may vary greatly in their admissions criteria, requiring a certain class rank in high school or a minimum SAT score or a great essay or all of these. So you could meet baseline requirements and be eligible to attend a college or university but not be accepted at any or all higher educational institutions to which you apply.

Note that though the federal programs indicate that borrowers must be current on their mortgage loans and have a good payment history in the last 12 months, lenders may also have credit score and debt-to-income ratio requirements.

4. Don’t Take “No” for an Answer

Lenders may have told you that you don’t qualify for a refinance. But Erin says that you should keep looking, even if you get turned down.

Reject “no” because:

  • The programs have changed and made more accessible (see #1).
     
  • You may not meet a certain lender’s requirements but qualify for a refinance with another lender.
     
  • Lenders and their employees are not perfect or perfectly knowledgeable; they may give you inaccurate or incomplete information.  

So even if you hear that you don’t qualify to refinance your mortgage, realize that you simply may not qualify for that specific lender’s criteria at the time.

5. Let Banks Fight for Your Business

With a high-interest, underwater-mortgage loan, you may not feel empowered in the personal finance realm. But if you are current on your payments and have been for a while, lenders may still be interested in helping you.

There are various ways of getting banks to bid on your business: you might approach a trusted mortgage broker and get quotes from multiple lenders, you may decide to call lenders yourself, or you may use an online service that obtains quotes on your behalf, such as Zillow Mortgage Marketplace or Lending Tree. And, counterintuitively, your current lender may be more likely to refinance your mortgage than other sources.

Whatever you do, don’t pay someone upfront to help you.

6. Be Patient, but Don’t Put Up With Lousy Service

Many people quit searching for a refinance deal because they get frustrated and just don’t have time to search. Sometimes the process is too long.

Erin tells me that many lenders are overwhelmed with demands and don’t have the capacity to handle the business. When I mentioned the urgency that many people may have due to program expiration dates (HARP is scheduled to end in December 2013), she advised to find a responsive lender and/or evaluate service provided by lenders upfront using reviews posted on Zillow’s website or by asking for recommendations from friends.

As a rough gauge, one homeowner told me that her refinance took a couple of months to complete.

7. Be Happy With a Better Deal, Even If It’s Less Than Perfect

Blogger "J. Money" at Budgets Are Sexy accepted an offer that Chase initiated with him. He has not yet been able to take advantage of historically low rates, but he did improve his circumstances.

He refinanced a 6.875% interest-only, 30-year mortgage to a 30-year, 5.5% fixed-rate mortgage. Closing costs were $5,000, and his monthly payment went up slightly from $1,917.96 to $1,941.42. However, the outstanding balance on his loan is being reduced by $320 per month now that his monthly payment includes principal and not just interest. Plus, he got to skip a payment between the loans, which helped pay the loan expenses.

Though he had tried to refinance his underwater mortgage for a couple of years, his attempts failed until he received a call from Chase, his current mortgage company. He was surprised and fearful of a scam, but happy that things worked out for him.

Five thousand dollars sounds like a lot of money, and closing costs can vary significantly. To figure out whether the refinancing deal is a good one for you, calculate the break-even point. You can use calculators found on financial or real estate sites like Zillow and Bankrate. The results typically indicate the number of months it takes to recoup the cost of getting a new mortgage. Another way to figure out savings is to compare interest payments over the life of the loan.

Note, though, that a refinance like J. Money’s doesn’t fit these models because he moved from an interest-only (I/O) mortgage to a fixed-rate mortgage, which required slightly higher monthly payments that included a reduction in principal. In this case, you could consider cash flow savings and principal reduction — divide the incremental expenses ($5,000 in closing costs less the skipped payment of $1917.96) by the incremental benefit ($320 in principal reduction less the increase in payments or 1941.42-$1917.96) to get a break-even point of 10-11 months. Also, the original loan would have eventually required higher payments and end up costing significantly more.

Even though borrowers aren't able to gain home equity immediately, those who are able to refinance underwater mortgages can dramatically improve their finances. A lower interest rate can mean lower payments and more money to accelerate a mortgage payoff, put toward student loans, or save for retirement.

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Guest's picture
On Time But Swimming With The Fishes

I have looked into these programs but the high up front payment required by the goverment to qualify combined with the monthly PMI erodes any savings a lower rate would garner. Atleast this is the scenario I've run into. While a lower rate might sound great and appealing, you refinance to save money, not just for a lower rate.

Julie Rains's picture

You should definitely refinance only if it saves you money! The refinance calculators that I mentioned can help though certain situations like J. Money's Interest-only loan can confound those calculations.

I like to build amortization schedules to figure out whether a lower interest rate will help and recommend that approach for anyone considering a new loan -- sometimes paying a few thousand dollars, as difficult as that may be -- saves in the long run.

Guest's picture

Unfortunately even with the government programs, I still do not qualify for a refi since my loan is not FHA nor backed by Fannie or Freddie. That doesn't mean I don't try. I've called at least 10 mortgage brokers hoping one will help me, but unfortunately non have.

I am going to keep trying, since housing prices have stabilized/are rising in my area and I am hoping lenders will become a little less strict on their guidelines. I'm not worried either since the Fed has said they plan on keeping rates low through 2014, so I still have another year of trying!

Julie Rains's picture

Glad you are going to keep trying. Even if lenders don't become less strict, a higher home value could qualify you for lower rates.

You might consider the lazy approach of letting lenders find you through one of the aggregated loan services. I've looked at Zillow's service, for example, and you don't have to enter personal information to get loan quotes, though you do enter info about your loan, home, etc.

Guest's picture
Guest

Previously turned down for HARP, but now qualify under the new program. Also, it is a no-fee refinance. I'm cutting my rate in half.

Julie Rains's picture

Glad to hear this good news about your refinance! If you have tips on how this processed worked for you, please share.

Guest's picture
Guest

Follow-up note: Just closed on refinance through new HARP program (with same bank that previously turned me down for the original program). Entire process from first phone call to closing was just over 90 days. With this new HARP program I did not have to pay ANY fees and did not have to go through the appraisal process. I will be saving about $450 per month. I believe this new HARP program only goes through until the end of 2013, so if it sounds like it might be for you, you should start checking it out now. I don't think you have to go through the same bank you have your mortgage with now, but it did seem to make it easier.

Guest's picture
Vtl

Is there anyone I can contact for help with this? I am paying over 9% and my mortgage company will not even talk about a refi. They are getting too much of my money for that. I am now in only fair credit and my home value has dropped so that I owe more on my home than I will ever get for it. I can only see going into forclosure but I need help figuring out my options. I could pay it easily if I could get refinanced at near today's rates. I am too abused by this mess to trust myself with decisions.

Julie Rains's picture

The Making Home Affordable website has a lot of great info, though I have highlighted much of that in this post -- still worth a visit: http://www.makinghomeaffordable.gov/Pages/default.aspx

You can also find a HUD-Approved counselor in your area here: http://www.hud.gov/offices/hsg/sfh/hcc/fc/

or talk to someone at the Hope Line listed here: http://www.makinghomeaffordable.gov/get-started/housing-expert/Pages/def...