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Posted May 10th, 2012 under Upside Down House Options

Short Sale or Mortgage Refinance: Which Is the Best Underwater Mortgage Option for You?

Tags: short sale help, mortgage refinance, underwater mortgage

Short Sale or Mortgage Refinance: Which Is the Best Underwater Mortgage Option for You?

Homeowners with an underwater mortgage have many options. Two of the big ones are trying to obtain a mortgage refinance vs. selling the home in a short sale. Both have their advantages and disadvantages, which you need to carefully consider before making a decision about how to proceed.

In simple terms, refinancing your mortgage involves taking out a new loan to pay off your existing mortgage loan. Often, homeowners pursue a mortgage refinance when interest rates fall, since they'll be able to obtain a more affordable loan. Since current interest rates are relatively low, some underwater homeowners may be interested in pursuing a refinance in order to lower their monthly payments.

The problem, however, is that it can be difficult to refinance an underwater mortgage, since your home's value has declined. Fortunately, some homeowners can take advantage of the federal government's Homeowner Affordable Refinance Program, or HARP. HARP helps homeowners with Fannie Mae or Freddie Mac loans refinance at a lower interest rate and with more stable terms. Some recent changes expanded HARP eligibility, including eliminating the loan-to-value cap, which means that you theoretically qualify for a HARP refinance no matter how underwater you are.

Mortgage refinance is a good option to consider if you want to remain in your current home. In the best-case scenario, refinancing means you'll have more manageable payments and less stress. Refinancing also won't hurt your credit score, unlike a short sale. But obtaining a refinance can be time consuming, and banks often turn down refinance applications. While it's a good option for some homeowners, it's not something you want to pursue without getting all the facts.

If they can't get (or don't want) a mortgage refinance, many homeowners with an underwater mortgage turn to a short sale. The reasons for pursuing a short sale vary tremendously. In some cases, homeowners may want to sell their house in order to relocate; in other cases, they may be unable to manage financially and a short sale is a way to get back on their feet.

In a short sale, you sell your home for less than what you owe on your mortgage. For a short sale to work, your lender must agree to the deal. That means the bank will probably want some proof that you're facing a financial hardship which makes staying in the home difficult or impossible. Short sales can be tricky to navigate and may take months to process. In addition, a short sale will ding your credit score (though the effect won't be as bad as a foreclosure). On the plus side, getting short sale help can allow you to get out from under a burdensome underwater mortgage and get a fresh financial start.

So which is the best option for your, short sale or mortgage refinance? The answer really depends on the specifics of your situation your current finances, how much you owe on your underwater mortgage, how much your home is worth, etc. It's a hard decision to make on your own, which is why we created the Underwater Homeowner Assessment and Action Plan. Our goal is to provide mortgage refinance and short sale help to homeowners so that they can make educated choices about how to proceed with their underwater mortgage.