The most important thing to ask yourselves is: can you afford the payments as they are, and do you like your home? If the answer to these questions is yes, there is no reason to short sell. Your value will eventually come back. Your rate on your first mortgage is not terrible, and right now you probably have a low rate on your HELOC because it is most likely tied to prime, which is very low now. If you can make extra payments towards that loan, it would be a good idea. It is true that you cannot take advantage of a refinance because regardless of your loan being Fannie Mae, Freddie Mac or FHA, the program is not able to be used with subordinate financing, which is what the HELOC is.