I have 80/20 loan when I first bought my home, 20 being HELOC. The following year I refinanced this HELOC with another HELOC, but with fixed rate. Does this mean this HELOC became a recourse loan in California?
(Note from Bill: The following is a good but brief comparison of recourse and non-recourse loans in California, and how this issue pertains to Home Equity Lines of Credit. For a more in-depth discussion of these issues, see "Is My HELOC a Recourse or Non-Recourse Loan in California?")
I think by refinancing only your second loan, you turned the loan into a recourse loan. A recourse loan is one where the lender can collect the amount you owe on a deficiency balance. A non-recourse loan is a loan that the bank can only look to their secured interest. In other words, they can only foreclose, they cannot get a deficiency judgment and attempt to collect it. Whether a loan is recourse or non-recourse varies with the state you are in.
The big mistake homeowners make is when they unknowingly turn a non-recourse second loan into a recourse loan by refinancing it. So how is a second mortgage also a non-recourse loan? Simple, in an 80/20 loan, it was "purchase money" for your home. A purchase money loan is one where the money went from the lender, to escrow, and then to the seller or to pay purchase closing costs. In California purchase money loans made on your home (note: not second home or investment properties) are non-recourse.
The mistake comes when you refinance your second purchase money mortgage. Because it is no longer a purchase money loan, a refinance transforms it into a recourse loan. That means the lender has the option of chasing you into bankruptcy collecting it. Or worse, they will sell it to a debt collector.
I suggest that you confirm the status of your second loan with your lender, and see if another form of refinance (to club both the loans) will make it a non-recourse loan.
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