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Q.Why am I being told that Refinancing is a big big mistake?
A.Well it is only a mistake if there is even the slightest potential that you may wind up in foreclosure. In California a "Purchase Money Loan" is a non-recourse loan. If a buyer used either a single mortgage or a first and a second to BUY their personal residence, both loans would be considered Purchase Money Non-Recourse Loans. As such, if the home owner some day winds up in foreclosure, the lenders on both the first and the second mortgages used to BUY the home are prevented from seeking a personal deficiency judgment against the homeowner.
However, the constant lowering of interest rates and the ever increasing equity in homeowner's properties led to a waive of refinancing over the past decade. Unfortunately refinancing has the nasty side effect of turning what once was a non-recourse loan into a recourse loan.
This is important because a lender can only look to the secured interest in the event of a default on a non-recourse loan. In other words, if a homeowner defaults on a non-recourse loan the home owner can just walk away - the lender can only foreclose on the property- the lender cannot get a personal deficiency judgment against the homeowner on a non-recourse loan. If the original non-recourse loan was refinanced, now the lender has the option of filing a judicial foreclosure and seeking a deficiency judgment against the homeowner for any shortfall.
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