Here’s a question I received from a homeowner who watched my Saturday afternoon interview on CNN. By sharing the response here — as opposed to just by email between myself and the person who sent me this great question — I hope everyone benefits:

Question: I refinanced in October of 2007 (at that time my home appraised for about $650,000). I received a mortgage for about $525,000 at an interest rate of 7.75 percent fixed for 3 years. I have one more year to go, however, my home is now only worth about $480,000.

My lender says I cannot refinance for a lower rate because I do not have any equity in the home. I have never been late on my mortgage payments and my credit score is 735. It has been very difficult working 2 and sometimes 3 jobs; I cannot maintain much longer. How can I refinance to get a lower rate or do I need to get a loan modification? Please help?

Answer: There is a home retention option known as a “short refi”. I don’t know if you’ve heard of it, but it works like this:

If your lender will short refinance you it means your lender will refinance your existing home for the present market value of the house (i.e. $480,000). Your lender will forebear the amount in excess of that amount (i.e. $45,000). Your lender won’t forgive the excess amount as some wish they would, but they will essentially postpone that amount. How this is beneficial is that the new mortgage payments are calculated on the $480,000 principal balance and not the $525,000 amount. This can have a dramatic affect on your monthly payment. Let’s say your lender doesn’t change the interest rate at all but only converts you to a 30-year fixed rate at 7.75 percent. That still amounts to an over $300 a month savings by not including the 45K into your payment calculation. When the market rebounds or you go to sell the house, you’ll still owe and have to pay the $45,000 amount, it’s just not used to calculate the current payment. Approach your lender with the idea of a short refinance and see what happens.

If your lender won’t consider it, ask about what other programs are available. You should be prepared to encounter some resistance because you’re not delinquent. Lenders have been slow to warm up to the concept of modifying payments before the borrower has missed payments. Ask anyway. You sound very committed to keeping your house, so your lender might be a little more willing to work with you.

Ralph R. Roberts, GRI, CRS Award-Winning REALTOR® and Author Loan Modification For Dummies (avail. Summer 2009)