Watch CBSN Live

How to refinance your underwater mortgage

By Casey Bond/GOBankingRates

Underwater mortgages, or homes with negative equity, have been a major problem over the last several years. As recently as 2012, Zillow reported that 31.4 percent of homeowners with a mortgage (close to 16 million individuals) were underwater, owing $1.2 trillion more than the value of their homes.

Needless to say, borrowers in this situation are desperate to stay afloat.

There are several options available to homeowners who owe more on their mortgages than their properties are worth. If you are able to make your mortgage payments, but want to reduce them to a more affordable level, here is how to find out if you're eligible to refinance your underwater mortgage and the steps you can take to obtain an affordable loan.

Is your mortgage underwater?

First, determine if you truly have an underwater mortgage. An underwater mortgage is defined as a loan for a home that is worth less than the current mortgage balance -- also referred to as having negative equity. This occurs when a home loses value after it is purchased.

If your mortgage is, in fact, underwater and you want to refinance, you should be aware that it is no easy task.

The Home Affordable Refinance Program (HARP)

For underwater mortgage borrowers with a solid payment history, HARP, part of the Making Home Affordable Program, might help refinance an underwater mortgage. According to its website, some of the qualifications that must be met to refinance are:

  • You are the owner-occupant of a one- to four-unit home.
  • The loan is owned or guaranteed by Fannie Mae or Freddie Mac.
  • At the time you apply, you are current on your mortgage payments.
  • The amount you owe on your first lien mortgage does not exceed 125 percent of the current market value of your property.

This is really the only way to refinance an underwater mortgage. As explained in an article in The Washington Post, "The refinancing program targets borrowers who are not in trouble on their mortgages now but, because they are underwater, are at risk of falling into trouble later."

This means you can only refinance if you're up-to-date on payments. If you have defaulted on your mortgage already, refinancing with HARP is not an option.

Steps to refinancing under HARP

It is important to note this program does not decrease the amount you owe -- it only refinances the loan in order to make interest rates and monthly payments more affordable. Until more principal reduction programs are made available, refinancing usually means paying more for your home than it's worth.

If you decide this is the route you want to take, be sure you meet the HARP eligibility requirements. You can find out if your mortgage is backed by Fannie Mae by using the Loan Look Up or Freddie Mac with its Self-Service Look Up.

You can request a Home Affordable Modification on the Making Home Affordable website.

View CBS News In