When you refinance your mortgage, you are essentially replacing your existing mortgage with a new one. People refinance for many reasons, including getting a lower monthly payment or reducing their interest rates. In some cases, refinancing can have many benefits, including shortening the term or your loan, getting rid of mortgage insurance fees, or switching from an adjustable rate mortgage to a fixed rate mortgage.

When preparing to refinance your mortgage, you should contact your current mortgage company to determine what requirements it has for refinances. Some lenders have a policy that refinancing is only available after a certain amount of time has passed. You may choose to refinance with your existing lender, or you may negotiate with a different lender in order to find the terms that are best suited to you.

What Legal Issues Might I Encounter When Refinancing My Mortgage?

There are many factors to consider when you are preparing to refinance your mortgage. While you are paying off the existing mortgage on your home, you are also incurring more debt. Finalizing and closing on your refinance may involve fees from the lender and the closing agent related to the transaction, as well. For example, because a refinance is a whole new mortgage loan, you may incur fees for an appraisal, title search, and lender applications fees.

Although a refinance can have many financial benefits, it is important to carefully consider whether the costs of refinancing outweigh the potential savings.

Other things to think about include:

  • Purchase Money Mortgage Protections: In many states, a mortgage used to purchase the home provides certain protections. In the case of foreclosure on a purchase money mortgage, lenders may not be able to sue you if they lose money on the foreclosure (called deficiency judgments). If you refinance, the new mortgage means that you lose the protection of that purchase money mortgage.
  • Prepayment Penalties/Loan Availability: Some loans include penalty fees if you pay off the mortgage (whether you sell the home or refinance) before a certain period of time, usually between two and five years, has passed from the original loan date.
  • Debt Payments: Some people use refinances to cash in on the equity in their homes and use the funds to pay off other debts, like credit cards. Unfortunately, some of those same people immediately turn around and rack up more credit card debt. While refinancing may seem like a good solution to some financial problems, it is important to carefully weigh the decision before taking the plunge.
  • Second Mortgages and HELOCs: The funds from a refinance are generally used to pay off the first mortgage on the property. If you have liens on the property, a second mortgage or a Home Equity Line of Credit (also known as a HELOC), refinancing can become more challenging. Your lender may require that you resolve any potential liens, like tax liabilities, before refinancing.

When it comes to secondary mortgages, your lender may require that the second mortgage be paid off and/or your HELOC closed out before or as part of the refinance transaction. This reduces the risk that the refinance lender may not get paid if you were to default on your home loans.

What Is a Mortgage Lawsuit?

Depending on the circumstances, a dispute between the parties can result in a lawsuit based on mortgage issues. Because there are so many moving parts to a mortgage negotiation, there are many examples of mortgage lawsuits. For example, If the borrower fails to make their monthly mortgage payments, the lender can file a lawsuit that can result in foreclosure. Unfair contract terms may be disputed in court, which may result in a re-writing of the terms of the mortgage in order to protect the borrower’s rights.

Depending on the circumstances of the situation, there may be disputes over the handling of the escrow account associated with the mortgage or over a loan modification agreement (where the lender agrees to modify certain terms of the existing mortgage). In some cases, the courts may award monetary damages to the faultless party.

Do I Need a Lawyer to Help Me Refinance My Mortgage?

If you are considering refinancing your mortgage, you may find it helpful to consult an experienced real estate attorney. A local attorney can explain the legal issues you are facing in refinancing your mortgage and assist you with contract terms and negotiation. In some states, the attorney can also act as your closing agent, and explain the paperwork affiliated with the refinance transaction.

If you run into an issue with the mortgage, and need to file a lawsuit, a qualified lawyer can also help you determine what rights you have against your lender, represent you in court, and help you get the best possible outcome for your case.