I received this question recently from a reader who is wondering what her options are for refinancing her underwater mortgage:

A recent announcement by underwater by offering either a principal reduction or an interest reduction. I called our mortgage company’s modification department — CitiMortgage — and they didn’t know anything about it. What do you recommend that I do next? And, what do you think of companies like the Guardian Group (https://www.guardiangroupna.com/) that offer to buy your mortgage and sell it back to you? Is this a legitimate way to get a principal reduction?

For help answering this question, I turned to Kim Clugston, Vice President and Senior Mortgage Loan Officer at Bank of Ann Arbor. She explained that few banks are actually offering loan reductions and that they are not required to do so. Each lender can offer “work out” programs to its customers, but the lender makes up the rules.

Ms. Clugston further explained that the Obama Administration created standard refinancing programs through the Making Home Affordable plan as part of its Financial Stability Plan. Making Home Affordable refinancing at current market rates is available to all lenders if the mortgage is held by Fannie Mae or Freddie Mac. Check here to find out if your mortgage is eligible.

The rub for most homeowners is that the new loan cannot be for more than 105% (Freddie Mac) or 125% (Fannie Mae) of their home’s current appraised value. Moreover, principal is not forgiven under these programs and second mortgages cannot be rolled in.

Regarding companies offering to buy your mortgage and sell it back to you, Ms. Clugston pointed out that the Making Home Affordable website’s homepage currently has a warning against foreclosure rescue scams. The site warns: “Do not sign over the deed to your property to any organization or individual unless you are working directly with your mortgage company to forgive your debt.”

If you have an underwater mortgage, I recommend that you research Making Home Affordable and check your eligibility for its programs. You can also get free help from housing counseling agencies approved by the U.S. Department of Housing and Urban Development. Ultimately, you will likely need to work directly with your loan servicing company if you are an eligible and good candidate for refinancing.

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Please note that this blog post is for educational purposes only and should not be construed as advice specific to your situation. You should get advice from a legal, accounting, or investment professional before deciding what course of action is appropriate for you.