FAQ's - What is the Legal Effect of a Refinance?
Q. I have a property in Palm Desert, California that I owned prior to my marriage. It is in my name alone. I am refinancing the property to pull out some money which we need to cover other bills and to get a better interest rate and so reduce our payments. Is there anything I should be aware of?
A. Yes, there are some critically important things you need to know.
The most important is that the lender, perhaps through the escrow officer for the first time, just as the escrow is about to close (when you are anxious to get the deal done and your hands on the money) might inform you 'by the way' that the new mortgage includes your wife's name and may request that you add her to title to the property.
It does not matter that this is a mere "formality", or that it is not your intent to gift half of your existing or new equity to your spouse, or that she agrees that the property remains 100% yours (it wouldn't be 100% yours even before your put her on the deed, because of the "Moore-Marsden effect", but more about that elsewhere), or that you acted under duress because you could not afford the delay to redraft the loan papers.
The moment she is placed on the deed, the legal effect will be to transmute your separate property so that it becomes community - that is, what was yours becomes yours and hers. This can only be undone in a separate, subsequent writing, which constitutes a second transmutation. This requires her consent at that time, and good luck getting it!
Q. So, by placing her on the deed, I give her half of all the equity up to that point?
A. Assuming that is not what you intend then, thankfully, that is not exactly the consequence. Where a valid transmutation occurs (and deed transfers are presumptively valid), there still remains what is known as Family Code section 2640 tracing right of reimbursement. This is a continuing separate property interest that belongs to you - assuming you do not and did not waive that reimbursement in clear separate writing. This is the separate property equity that exists as of the date of the new deed, into the future.
So, assuming on the date of marriage you place the home you received in your last divorce (btw, why are you getting remarried without a
premarital agreement?) into joint tenancy with wife number 2. On that date the equity in that home is 100% yours and there is no Moore-Marsden effect to consider. Say you have $100,000 in equity.
In this simple example, absent a new transaction or a later refinance, you will continue to have a $100,000 separate property reimbursement claim in your home for all time, and in the event of a subsequent divorce, assuming at the time of the divorce sufficient evidence exists that allows you to prove the $100,000. That will typically simply consist of your mortgage balance on that date, and your testimony as to the fair market value of the property on that date (or an expert's opinion of value), with the difference being your 2640 reimbursement. You do not receive interest on that, but it does come "off the top" before the remaining equity - which would now be all community, is divided. The difference to note here is that if you had not deeded the property, it would remain your separate property subject to a Moore-Marsden reimbursement to community which usually is going to be smaller than the reverse situation.
Q. What is the Moore Marsden effect?
A. I will separately address equitable apportionment by Moore-Marsden in another FAQ, but for our purposes here it addresses a
pro tanto interest in the appreciation of a house with a mortgage, and principal reduction, that is paid with community funds during the marital period.
Q. Is there nothing I can do to prove that when she went on title it was only for estate planning purposes to protect her in the event of my death, and not in case of property division upon divorce?
A. You still have the ability to challenge the legal effect of the deed to her on one front: Because this is an interspousal transfer (assuming you did it after, and not before, the marriage was legally effective) there is a presumption that she acquired this interest by way of undue influence upon you. This is discussed in other articles I've posted, and in our
Fiduciary Duty section. If you can establish undue influence, duress, or some other breach of duty then you may be able to set aside the transmutation but you will continue to have the Moore Marsden consequences.
Q. What happens if she goes on title later, maybe several years after the marriage, in connection with this refinance? Is the outcome any different?
A. The net effect will be that whatever separate property interest you can establish by way of 2640 up through the date of the transmutation to her (the refinance and change in the form of title from separate to joint) will remain yours. Any monies borrowed upon the refi will be considered community funds, and all monies earned by either of you afterwards used to pay that new mortgage will be applied to the community mortgage debt, meaning that your separate claim will remain intact and unaffected. Again, it will not accrue interest and will be paid "off the top" before any community funds are divided.
Q. And if later the house has depreciated and there is no community equity above and beyond my separate interest?
A. Then you get your separate interest to the extent it exists, and an award of the house (which is now otherwise community because of the title deed you signed) without setoff or payment to her, but you are limited to the net equity even if it is less than the $100,000 you started with. She owes you no corresponding reimbursement on this property.
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