Underwater on a rental property in NY -- any ideas?

[Jamie Gruber]

Hello all .. I'm new to the forum and my wife and I are beginning to pursue real estate investment .. but we're unfortunately not rookies.  I wanted to see if perhaps anyone had any other ideas with a situation on our rental property. 

The deal is this -- I moved to Boston 8 years ago from Upstate NY for work and my relocation package included a loss on sale provision, but between the market for my house in NY and my initial handling of everything, the house didn't sell and at this point I'm underwater.  I bought the house when I was in my low 20's and just went along with the creative financing my mortgage broker sold me on. 

So here's where we stand:

- Value of the home is ~$140,000

- Loan on the home is ~$135,000 - this is where I made my mistake with financing -- I did the whole borrow 20% to put down to avoid PMI with a second mortgage. So i have a $98,000 first @ 6.25% and a $37,000 second at 9.375% (be kind .. it hurts to type this!)

- Mortgage payment in total is $1600 (taxes and insurance included) but the rent is only $1200

Thankfully, my wife and I do well and the financial reward of moving for the job far outpaces the $400 loss every month.  I have 20 years left on both mortgages.  I've tried to refinance the first through HARP but the second wouldn't re-subuordinate.  

If I sold the house, I'm not sure I'd get appraised value for the home.  And with realtor fees I'd likely have to stroke a check for $20-$30k at closing .. which is money I'd prefer to use on investing in other properties, now that we have a clue!

The point is, it's a losing situation right now financially, and I'm looking for any thoughts on how I might be able to turn it into a winner.  I'll take any (constructive) advice I can get.  Should I look at institutional investors to get a short term loan for the entire balance and then refi that amount later with a bank?  That was a thought I had .. but i'm not sure if its prudent.  Again, thanks for any assistance anyone can offer. 

[Christopher Brainard]

@Jamie Gruber

If you have the capital, I think I would pay off the second and refinance the first. The interest rate on both of your notes is exceptionally high, but by removing the second and getting a reasonable APR on the first, I think you'll be able to bring this down to where you break even every month. Then you just need to ride the wave and eventually it will be paid off.

-Christopher