Are you considering a refinancing of your current mortgage(s)? Maybe to lower your interest rate, to switch from an adjustable rate mortgage to a fixed rate, or maybe to consolidate a first and second mortgage into one loan?
Given today’s low interest rates, these could be prudent financial moves. However, there is one potential pitfall which should give pause for thought. Legally, there is a difference between a “purchase money loan” and a “refinanced” loan.
A purchase money loan is a loan (or loans) that is put into place at the time you are making the purchase of a property. For an owner occupied property, if you have financial difficulty at some time in the future (as many people are having today), and your home ends up in foreclosure, the only recourse the lender(s) has is to foreclose, sell the home, and get back as much of their loan as they can. The lender can NOT go after your other assets to make up their loss.
Once you have refinanced, and no longer have the loan(s) that were put in place at the time of purchase, the lenders DO have recourse. They’ll have an unsecured lien against your name. With this, they can attach your future wages, and come after you to make up every penny they have lost on that loan.
Disclosure: we (Robert and Gary) are not accountants or tax experts, but this is our understanding of the law. If anyone has a different point of view, we encourage your writing on this blog and sharing that viewpoint with others.
Gary Shapiro and Robert Gosalvez
Intero Real Estate Services