Upside Down on Mortgage – How to Reduce Mortgage Debt

Reader Question: “I have a mortgage on an ARM loan owing about $126,000, and a home equity on an ARM for about $32,000. I had my home just appraised in the last week and found out that it came back at $87,000. Are there any programs out there for people as myself with an upside down mortgage and if so what can I do to reduce this debt. I figure I am about $50,000 over on my home as of today. I am not late on any payments but I have heard that there are programs out there for people like me that still have good credit and are not late on any payments but can still reduce the debt that is owed on their homes. Is this a fact or fiction? Please email me back with some advice as to what I can do.”

You are in the same boat with a lot of homeowners right now. The housing bust reduced property values all across the country. In some places (California, Arizona, Florida, etc.), home values sank considerably. This has put a lot of homeowners into a situation where they owe more on their mortgages than their homes are currently worth. This is referred to as being upside down or underwater on the mortgage loan.

Generally speaking, there are two ways to restructure and/or reduce your mortgage debt. These are mortgage modifications and refinancing. The trouble is that traditional refinance loans don’t work for people who are upside down, because you need a certain amount of equity to be approved for the refi loan. So the “standard” refinancing strategy is not an option.

Part 1 – New FHA Refinance Program

The standard refinancing process might not work for you. But certain government-led programs might be an option. For example, the FHA recently announced a new program that permits lenders to offer refinancing loans to underwater homeowners. It was announced in May of 2010, and it’s supposed to begin sometime in the fall of 2010.

Here’s a fact sheet on the FHA refinancing program. It’s a good place to start.

Part 2 – Making Home Affordable Refinance Program

If your mortgage loan is owned by Fannie Mae or Freddie Mac (and there’s a good chance it is), you might be able to refinance into a lower payment through the Making Home Affordable Program. This program is designed for homeowners who are current on their mortgage payments, but unable to refinance because of decreased property value.

You can learn more about it on the official website.

Just keep in mind that these options may not reduce the principal amount you owe. [Correction: The FHA refinancing program mentioned in Part 1 could reduce your principal loan balance by at least ten percent. This is according to the fact sheet I linked to earlier.] They might help you lower your payments by securing a lower interest rate, but they probably won’t reduce the current debt you owe. You would need a mortgage modification to do that. Lenders will only reduce the principal amount owed in rare cases.

Here are some related articles you might want to read:

• How to Refinance an Upside Down Mortgage (check out the comments)
• Government Mortgage Assistance Programs

I hope this response has helped you out in some way, or at least point you toward some useful information. Good luck.