How Do I Refinance Non-Recourse Loans?

Non-recourse loans are subject to the laws of the state where you signed your loan contract. A non-recourse loan means: if your collateral is seized and liquidated, and its value fails to meet the amount remaining on your loan, the lender assumes this loss instead of seeking more funds from you. When you refinance a non-recourse loan, the process is not essentially different from refinancing a recourse loan. However, there may be unique risks posed to your lenders.

Step 1: Refinancing Whole or Partial Amount

Refinancing is simply taking a second loan to pay off your initial loan. The goal is to get the second loan at a lower interest rate, meaning you will owe less over the life of the loan. You will have to refinance through a separate lender; most lenders do not refinance their own loans and do not think favorably on attempts to refinance.

The first thing you will need to determine is how much of the loan you will refinance. You have likely partially paid your first non-recourse loan. You can elect to refinance only the portion that is not repaid. You can also elect to take a new loan for the total amount of the first loan. When you choose this option, you can pocket the difference after you pay off your first loan. This can give you some cash in the short-run if you are in need.

Step 2: Transferring Collateral

Your first lender will technically have partial ownership of the collateral you placed to finance the loan until the loan is paid off. You need to recover this collateral by paying off the loan in full. You must get the first lender to agree to your offer to pay off the loan in order to be released from your loan contract and recover the collateral.

In most cases, such as a mortgage refinance, you will then use this same collateral on your new loan or for your loan down payment. You will have to move through the process quickly so your collateral will be ready for your new lender. If the previous lender is still holding a lien on the collateral, you will not have the legal authority to use it as collateral on a new loan. 

Step 3: Electing a New Non-Recourse Loan

This is where a refinancing process is different for a non-recourse loan. Your goal should be to secure a new non-recourse loan, which is less risky for you than a recourse loan. If your new loan is a recourse loan, then you will owe the lender a balance on your loan if your asset goes down in value and you default. 

You will have some financial consequences in refinancing your loan, and one of those consequences is a drop in your credit score. The new lender may try to use this as a reason to elect a recourse loan instead of a non-recourse loan. You will have to negotiate this, and it is better if you do so before deciding to go with this new lender instead of once the process has been started.