How to Refinance Your Home if You’re Underwater

Two government programs can help homeowners who qualify get lower rates.

If the value of your home is less than you owe on your mortgage, refinancing to take advantage of today’s low interest rates -- recently 3.7% on a 30-year fixed-rate loan—may seem out of reach. But if you’re up-to-date on your mortgage payments, you may be able to refinance through one of two programs. Lenders participate voluntarily and can adapt the terms, so there’s no guarantee you’ll qualify. But you won’t know until you call your lender.

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If you want help (it’s free) before you make that call, consult a housing counselor approved by the Department of Housing and Urban Development (call 888-995-4673).

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With the Home Affordable Refinance Program (HARP), you can refinance to a lower rate and payment or a shorter term. Many more borrowers have refinanced through the program since the upper limit for the loan-to-value ratio (the loan balance divided by the market value of the home) was eliminated. However, some lenders still impose a loan-to-value limit of 150%, says Keith Gumbinger, with, a mortgage-tracking firm.

To qualify, you must have no late payments for the past six months and no more than one late payment in the past 12 months. Also, Fannie Mae or Freddie Mac must have owned your existing mortgage prior to June 1, 2009. (To check your mortgage, go to or call 800-732-6643. Also try or call 800-373-3343.) Lenders may charge you a slightly higher interest rate than for a “regular” refinancing -- say, one-fourth percentage point more. You’ll pay closing costs just as you would with any refi.

If you have an FHA mortgage, you can reduce your monthly payment or switch from an adjustable rate to a fixed rate with Streamline FHA. You must have had your current FHA loan for at least 210 days and have made at least six payments. If you’ve had the loan a year or less, you can’t have any late payments on your record. The refi must reduce your monthly payment (principal, interest and mortgage insurance) by at least 5%. No appraisal or verification of employment, income or credit score is required.

This article first appeared in Kiplinger's Personal Finance magazine. For more help with your personal finances and investments, please subscribe to the magazine. It might be the best investment you ever make.

Patricia Mertz Esswein
Contributing Writer, Kiplinger's Personal Finance
Esswein joined Kiplinger in May 1984 as director of special publications and managing editor of Kiplinger Books. In 2004, she began covering real estate for Kiplinger's Personal Finance, writing about the housing market, buying and selling a home, getting a mortgage, and home improvement. Prior to joining Kiplinger, Esswein wrote and edited for Empire Sports, a monthly magazine covering sports and recreation in upstate New York. She holds a BA degree from Gustavus Adolphus College, in St. Peter, Minn., and an MA in magazine journalism from the S.I. Newhouse School at Syracuse University.