To understand why being underwater on your two mortgages is a problem, you need to know how first and second mortgages work:

  • When you get your first mortgage, that lender is first in line to get paid off if you don’t pay your mortgage and your home is sold via foreclosure.
  • When you then get a home equity line or second mortgage, it’s called a second mortgage because that lender is second in line to get paid.
  • When you refinance your first mortgage, you actually pay off the original first mortgage. Unless you pay off the second mortgage, too, your second mortgage legally and automatically moves into place as your first mortgage.
  • No lender will give you a low, first mortgage interest rate unless it can be first in line for the foreclosure sale proceeds if you don’t make your payments. If your second mortgage has moved into first position, any new loan would automatically be behind it in line.

Here are five options that can help you refinance your first mortgage anyway:

1. Ask your second lender to subrogate its lien on your home. In simple terms, subrogate means your second mortgage lender agrees to stay in the second position and let your newly refinanced mortgage be the first to get paid off if your home goes into foreclosure.

This is much more likely to happen if the same company holds your first and second mortgages than if two different companies or investors are involved, says Sam Garcia, publisher of MortgageDaily.com.

If you have your first mortgage with one lender and your second with another, ask your second mortgage lender if it will refinance your first.

2. Use HAMP to modify your first and second mortgages at the same time. If you can prove it’s financially challenging for you to pay your first and second mortgages, you might qualify for the federal government’s Home Affordable Modification Program (HAMP). Banks that offer the HAMP second lien modification program will sometimes reduce or forgive what you own on your second mortgage.

3. Try HARP if you always pay on time. If you’ve been making payments on time and your first mortgage is for 80% or more of your home’s value, try the Home Affordable Refinance Program (HARP), which helps financially healthy home owners who are underwater because of combined first and second mortgages.

HARP is only for Fannie Mae- and Freddie Mac-guaranteed loans.

4. Check with your state attorney general for funds. The 2012 multi-billion-dollar settlement between the biggest banks and 49 state attorneys general (over robo-signing) to aid distressed borrowers included money to pay off second mortgages in some states.

“It’s worth finding out if that’s the case in your state by checking the website for your state’s AG to see if your existing servicer is participating,” Garcia says. And to find out if you’re eligible.

Search the AG’s website for “mortgage settlement” to find the information.

5. Do an FHA short refi. FHA has a short refi program for home owners whose combined first and second loans exceed their home value by no more than 15%. So, for a $100,000 home, you could owe $115,000 on your first plus your second mortgage and qualify. Contact your lender to see if it offers FHA’s short refinance option. The details:

  • The program is only for home owners who don’t currently have an FHA-guaranteed loan.
  • Your first mortgage lender has to agree to reduce your mortgage by 10%.
  • You have to meet FHA’s borrower guidelines for income and credit.