How to Refinance Your Mortgage if You Are Underwater

Are you struggling with an underwater mortgage? You’re not alone. Many homeowners find themselves in a similar predicament, where the outstanding balance of their mortgage exceeds the value of their home. The good news is that there are options available to help you refinance your mortgage and improve your financial situation. In this article, we will guide you through the process of refinancing your mortgage if you are underwater, so you can regain control of your finances and potentially save thousands of dollars in the long run.

Understanding Your Underwater Mortgage

Before diving into the refinancing process, let’s first understand what it means to have an underwater mortgage. An underwater mortgage, also known as negative equity, occurs when the outstanding balance on your mortgage loan exceeds the current market value of your home. This situation can arise due to various factors such as a decline in property value, economic downturn, or high loan-to-value ratios.

Being underwater on your mortgage can have significant consequences. It limits your ability to sell your home without incurring a loss, makes it challenging to qualify for traditional refinancing options, and may lead to financial distress. However, with the right knowledge and strategies, you can navigate through this challenging situation and find a suitable solution.

Assessing Your Refinancing Options

When it comes to refinancing an underwater mortgage, it’s crucial to explore the available options carefully. Here are some common refinancing options you can consider:

  1. Traditional Refinancing: This involves replacing your current mortgage with a new one that has better terms and interest rates. However, traditional refinancing might be challenging if you are underwater on your mortgage, as lenders typically require a loan-to-value ratio of 80% or less.

  2. Government Assistance Programs: Explore government-backed programs such as the Home Affordable Refinance Program (HARP) or the Federal Housing Administration (FHA) Streamline Refinance. These programs are specifically designed to help underwater homeowners refinance their mortgages, even if they have a high loan-to-value ratio.

  3. Short Refinance: This option involves negotiating with your lender to reduce the outstanding balance of your mortgage to match the current market value of your home. While not all lenders offer this option, it can be a viable solution for homeowners who are struggling with negative equity.

  4. Loan Modification: In certain situations, your lender might be open to modifying the terms of your mortgage to make it more affordable. This can involve reducing the interest rate, extending the loan term, or even forgiving a portion of the principal balance. Reach out to your lender to explore this possibility.

It’s essential to evaluate the pros and cons of each refinancing option and consider factors such as your financial goals, credit score, and income stability when making a decision.

Steps to Refinance Your Mortgage if You Are Underwater

Now that you have a better understanding of the available options, let’s dive into the step-by-step process of refinancing your mortgage if you are underwater:

Step 1: Research and Gather Necessary Documentation

Start by researching different lenders and programs that offer refinancing options for underwater mortgages. Look for reputable lenders with experience in handling these types of situations. Gather all the necessary documentation, including proof of income, tax returns, credit reports, and mortgage statements.

Step 2: Calculate Your Loan-to-Value (LTV) Ratio

Determining your loan-to-value (LTV) ratio is crucial in understanding the extent of your negative equity. Divide the outstanding balance of your mortgage by the current market value of your home and multiply the result by 100 to get the LTV ratio as a percentage. This calculation will help you assess your eligibility for various refinancing programs.

Step 3: Research Government Assistance Programs or Refinancing Options

If you find that your LTV ratio is above the threshold for traditional refinancing, research government assistance programs such as HARP or FHA Streamline Refinance. These programs have specific guidelines and requirements that cater to underwater homeowners. Familiarize yourself with their eligibility criteria and determine if you qualify.

Step 4: Contact Lenders and Explore Refinancing Opportunities

Reach out to lenders who specialize in refinancing underwater mortgages or those participating in government assistance programs. Discuss your situation, provide the required documentation, and inquire about their refinancing options. Compare the terms, interest rates, and fees offered by different lenders to ensure you are getting the best deal.

Step 5: Compare Offers and Negotiate Terms

Once you receive offers from various lenders, carefully compare the terms and conditions. Pay close attention to interest rates, closing costs, and any potential penalties. Negotiate with the lenders to secure the most favorable terms. Remember, refinancing an underwater mortgage can be a complex process, so don’t hesitate to seek advice from a qualified mortgage professional.

Step 6: Complete the Refinancing Process and Close the New Loan

After selecting the lender and finalizing the terms, complete the necessary paperwork and submit it for processing. Be prepared to provide additional documentation if required. Once everything is in order, schedule the closing of the new loan. Review the loan documents carefully, ask questions if needed, and sign the necessary paperwork to complete the refinancing process.

Frequently Asked Questions (FAQ)

What are the eligibility criteria for refinancing an underwater mortgage?

Eligibility criteria vary depending on the refinancing option you choose. Traditional refinancing typically requires a loan-to-value ratio of 80% or less, a good credit score, and stable income. However, government assistance programs like HARP or FHA Streamline Refinance have more flexible guidelines for underwater homeowners.

Is it possible to refinance if I have bad credit?

While having a good credit score makes the refinancing process smoother, homeowners with bad credit can still explore refinancing options. Government-assisted programs often have more lenient credit score requirements, making them viable options for those with less-than-perfect credit.

Can I refinance if I have more than one mortgage on my property?

Refinancing multiple mortgages on a property can be challenging but not impossible. Each lender may have different policies regarding refinancing second or third mortgages. It’s best to contact lenders directly to discuss your specific situation and explore available options.

How long does the refinancing process typically take?

The refinancing process duration varies depending on several factors, including the lender, program, and complexity of your situation. On average, it can take anywhere from 30 to 60 days to complete the refinancing process. However, unforeseen circumstances or additional documentation requirements may extend the timeline.

Are there any fees or costs associated with refinancing an underwater mortgage?

Yes, refinancing often involves fees and costs. These may include application fees, appraisal fees, origination fees, and closing costs. However, it’s important to weigh these costs against the potential savings and benefits of refinancing. Be sure to discuss all fees and costs with your lender upfront to avoid any surprises.

What are the potential risks or downsides of refinancing?

Refinancing an underwater mortgage can have its risks and downsides. These may include extending your loan term, which could result in paying more interest over time. Additionally, there may be closing costs and fees associated with the refinancing process. It’s important to carefully consider these factors and do the math to ensure that refinancing makes financial sense in your specific situation.


Refinancing an underwater mortgage may seem like a daunting task, but with the right knowledge and guidance, you can navigate through it successfully. By following the steps outlined in this article and exploring the available refinancing options, you can regain control of your finances and potentially save a significant amount of money in the long run. Remember, each situation is unique, so it’s crucial to assess your individual circumstances and consult with mortgage professionals to make informed decisions. Don’t let negative equity hold you back – take action today and explore the possibilities of refinancing your underwater mortgage.