Refinance options when you're underwater

Beginning in the sixth year, a borrower's mortgage rate may begin to increase, but no more than 1 percentage point a year until it reaches "the market rate at the time the modification agreement is prepared," according to the Making Home Affordable Web site.

Lenders offer several different types of modifications, says John Walsh, president and founder of Total Mortgage Services in Milford, Conn.

"(The mortgage company) could amortize your current mortgage to a longer term, a lower interest rate or forgive some of the principal balance of your loan," he says.

While a modification may be a good option for some, there are strict qualification guidelines, Walsh says. For example, the home must be a primary residence, the mortgage must be less than $729,750, the current monthly payment must be more than 31 percent of your current gross income, and you must be able to demonstrate you are having difficulty making the payments.

The loan modification also has a trial period of 90 days, after which the lender reassesses the borrower's situation to see if he or she qualifies for the long-term modification.

Third option: reality check

Underwater borrowers who don't qualify for HARP or HAMP may find themselves out of luck.

"Unfortunately, there are no other government-backed refinancing options," Bonarrigo says.

But that doesn't mean you shouldn't try to negotiate a loan modification with your mortgage lender.

As an alternative to foreclosure, many lenders are willing to offer some kind of loan restructuring even without a government-backed program.

"Whatever you do, don't bury your head in the sand," Bonarrigo says. "Don't wait for (a) foreclosure notice."

If restructuring the loan is not an option, ask about the possibility of a short sale -- which means selling your house at market value, with the remaining loan balance forgiven by the lender.

"A short sale is preferable to foreclosure, less of a negative impact on your life," Bonarrigo says. "And given today's climate, banks are open to it."

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