Did you only bet the house?

3 years ago I could have asked 100 people if there was any disadvantage to refinancing their home loan to get a better rate and I’m sure at least 99 of them would have told me no.     Fast forward 3 years and the distinction between purchase money loans and non-purchase money loans (refis) has become all too clear for a lot of homeowners.

California foreclosure law prevents lenders from filing a deficiency judgement against homeowners whose homes are in foreclosure if they have a purchase money loan.   In other words, if you never refinanced your loan and the bank foreclose, the only recourse they have is to take your home.  They can’t lay claim to any of your other assets or personal possessions to clear the remaining debt.   However, no such protection currently exists for anyone who has refinanced their loan.  A refinance is not considered a purchase money loan even if it’s done purely to lower the rate on the loan.  So by refinancing you are effectively putting not just your home up as collateral for the loan, but all  your other assets and personal possessions too.

Thankfully relief is on the horizon in the form of State Bill 1178 which was recently passed by the State Assembly.  This bill extends the protection to those who refinanced their home loans up to the amount of their original purchase money loan.   Assuming Governor Schwarzenneger  signs the bill into law it should take effect in June 2011.   Note, however, if you’ve been using your home like an ATM machine to finance new cars, holidays or even home improvements, the additional cash-out value will not be protected by this law.   If the bank forecloses you could still find yourself at risk of losing more than your home.

Let’s hope our Governor gets signing soon so we can take advantage of these historically low rates without risking the shirts on our backs.

UPDATE: Arnie didn’t sign it into law so it’s still a case of “refinancer beware”

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