Refinancing your home can be a good or bad idea depending on your individual situation. While refinancing can save a person money, many people don't know that refinancing changes the type of debt you have. This means that there are potential concerns about the safety of your personal assets once you refinance a loan.
What Is Refinancing?
Refinancing is the process of replacing the mortgage you currently have with a new mortgage with different terms. Interest rate, type of interest and repayment period can all be changed by refinancing a home. The main lure of refinancing is the opportunity to get a lower interest rate.
Recourse Debt
The main drawback of refinancing your home mortgage, according to the financial website Bills.com, is that your debt becomes recourse debt instead of nonrecourse debt. Your original mortgage is nonrecourse debt, meaning it is secured by having your home as collateral. When you refinance, that debt is not collateralized by your home. There are several drawbacks to having recourse debt.
Personal Liability
Recourse debt creates personal liability to the repayment of your new loan. For example, in your first loan, if you defaulted, the lenders could take back your home but not come after you personally. With recourse debt, such as a refinanced loan, you are personally liable, meaning lenders can track you down wherever you go to make sure that you pay them back.
Personal Assets
Your personal assets, like boats, vacation homes, cars and jewelry, are all protected with a nonrecourse first home loan. The second you refinance and the loan becomes recourse debt, those personal assets are at risk. If you default on your loan after refinancing, lenders can take any personal assets that you have away from you and then sell them off to make money to repay your debt.
Garnished Wages
Even if you don't have any personal assets, defaulting on a refinanced home loan means you are still at risk. The financial website Investopedia states that with a recourse loan, the lender is able to collect a deficiency balance from a borrower who defaulted, even if it means garnishing his wages. Essentially, if you default after refinancing, the lender can sue you to take some of the money you earned as income from your job.
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