short refi vs loan mod???

[Joel Fraser]

BACK STORY - My husband and I purchased our home in June of 2005 for $650K with an 80%, 3/6 Intrest only ARM with an interest rate of 6.89% (Morequity) and a second for the remaining 20% at 7.99% with a 100K balloon payment due at 20 years (GMAC). Since we purchased the home at $100K under market (purchased from landlord, fsbo), and with the rate that home value was appreciating in CA., we thought it would be able to refinance to an 80% 30 year fixed rate after the prepay penalty expired and before the first adjustment in June 2008. Foolish, I know now. In May I contacted Morequity to refinance and the offer they gave me was ridiculous - included prepayment penalty, added $30k to the loan and at a higher interest rate - thus we declined. We called several other banks (who didnt return our calls) and finally found a loan broker who thought he could get us into an FHA - only to discover that our house had depreciated to $580K and we wouldn't meet the 97% LTV requirement. My loan with Morequity reset in june to 8.25% and the mortgage went up $1300 a month, giving us a $5,400/mo house payment (includes excrow) that doesnt even touch the principal. Since june we have cleaned out our savings covering the difference. I am currently selling some assets (garage sales, selling the spare car, etc.) to get enough to cover next month's payment. I am proud to say that I have only been late on a payment once since we bought the home, and that was only because the loan had been sold, and the payment went to the wrong bank. I even had GMAC remove the late payment from my credit report a year after it happened. Our credit is good - around 740, and we both have good jobs. The loan is scheduled to reset again in December, so I have got to get help started NOW. A few weeks ago the loan broker called and told me about the possibility of doing a short refi - basically getting an FHA loan and presenting it to the banks to see if they will accept it. I sent him my financials and waited. I called the broker for an update last week and he said that before we could start refinancing, I need to call the bank to see if the bank would consider the offer and find out how much they needed to settle. I called the banks and, imagine that, I got the run around. They they would neither confirm nor deny that they would consider a short refi. And they asked me to submit my financials for a loan mod. HERE's MY QUESTION Am I better off getting a new loan and submitting it to the banks to see if I they will accept the short refinance, or should I start with trying to get a loan modification? My thought is that if I start with loan mod, they wil most likely give me an offer that doesn't solve any problems long term; however if I start with the short refi, and they dont accept, it may help to expedite the loan modificatiion process and get me a better offer. Does anyone have any experience with short refi's through Morequity or GMAC? If I start with the short refi process, and they decline, will it hurt my chances at a loan mod? Any advice would be greatly appreciated.