Seems Mr. Bernanke and The Federal Reserve are hellbent on lowering mortgage lending rates after lowering short term rates to zero this week.

Problem is, 1 in 6 homeowners are underwater (owing more than the home is worth) on their mortgage, and will not have a chance to refinance to a low fixed rate.

Talk about a serious kick to the groin right?

Not only did you buy at the top of the real estate bubble only to watch your home’s value drop by 10% in 2 years, but now you find out that you can’t refinance to the super sexy 4.5% APY, 30 year mortgage rate that just became available.

Ain’t life grand!

What can you do if you are underwater on your mortgage?

Truth is, there really isn’t much you can do if you find yourself in this situation.  You can either:

1. Pay the difference between the original value minus the current value in cash at the closing table.
2. Stay in the home without refinancing, hope the real estate market rebounds, and pray that mortgage rates are still below what you are currently paying.

Let’s play banker & borrower!

I realize it’s a bitter pill to swallow, and I rarely try to justify the actions of a large banking institution, but consider the circumstances if you were a bank and an underwater homeowner approached you for a refinance loan.

Let’s say that you bought a home for $250,000 in 2006.  Now that mortgage rates have fallen, you want to refinance.

But the latest home appraisal has your home valued at just $225,000.  You’ve suddenly lost $25,000 in just 2 years, or a whopping 10% of the original value.

Since most people were able to buy homes with little to no down payment in 2006, you chose to go along with the crowd and do the same.  So you basically have no equity in the home.

Then, as you would expect, what bank in their proper state of mind would give a borrower a 110% mortgage loan at a lower 30 year fixed interest rate?

Therefore, you’re basically forced to play a waiting game with the real estate market while stuck paying the higher mortgage payment.

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