Dublin Ranch Homeowners Beware: There are PERILS in Refinancing!

I had the opportunity to meet with a Dublin Ranch homeowner two nights ago who needs to do a short sale on a condo in the Terraces. They are a really nice family; when we originally started talking they told me they had been declined a modification in the “Making Home Affordable” program, and had thought that letting their Dublin Ranch condo go to foreclosure was their only option. I’m glad we got a chance to talk about the potential perils in refinancing!

They had purchased their Dublin Ranch condo from Toll Brothers in 2004, and within only a few months refinanced both of their loans for a lower interest rate. Remember those days? When property values were climbing so fast that you could do a refinance every few months and enjoy more equity? I promise I’ll snap out of my nostalgia in 5… , 4… , 3… , 2…

Then yesterday I had a past client call me wanting to contact a loan agent to refinance the loan on a home I sold his family in 2008. After having the “effects of the refinance” conversation twice in the last 48 hours, it seems worthwhile to talk about it here on the blog.

So here’s the thing most people don’t know: when you purchase a home and get a loan, the loan you get is considered “purchase money,” and purchase money is normally “non-recourse debt.” When you refinance, the loan you get pays off the purchase money loan and that loan is normally “recourse debt.” The difference is this: with non-recourse debt your lender collateralizes the property and, if you ever default on the loan, the worst they can do is foreclose on the property.  If the loan is recourse debt, even if the loan is not a total loss and you have to sell through a short sale, the amount the bank loses through your default can be pursued after the house is sold and they can get a judgement against you which will force you to pay the remaining loan balance on a house you don’t own anymore.

Your loan agent would love to help you refinance your Dublin Ranch Home, and I’m sure you have no desire to default on your loan, but there are a lot of people in Dublin Ranch who are in circumstances they never thought they would be in, and it seems to be a conversation worth having.  If your loan agent can lower your payments through a refi, just make sure that the risk/reward ratio is worth it to you — in most cases, you’re in a way better position with a purchase money loan in the event of a catastrophic loss of income than you are with a refinanced loan.  You can contact me here if you want to talk or if you have any questions.

A couple of extra things on this; first, before you make any decision about allowing a home to foreclose or doing a short sale, it’s important to contact both a tax advisor and a legal professional — I’m not licensed to give you either kind of advice. The other thing is that the California Association of Realtors is currently lobbying to change the laws I described above. To read more about that, or to get involved in that movement, go here.