The most differentiating factor between purchase money and refinance money is the legal recourse that the institutional lending agencies have against you.
You see when you make the original purchase loan for your piece of real estate your agreeing that if you default that you are not liable.
The money is what's known as non recourse (meaning the bank cannot go after you for the lost portion of the principle.
) The first time you decide to refinance your mortgage to lower your rate, modify the principle amount or performing any type reduction in principle you loose the non recourse clause on your purchase money.
Now you enter into a recourse position where you become liable for the debt or the offset in principle when you perform a loan modification.
Even on a short sale if you have refinanced and now you are in a position where you are forced to sell due to financial hardship.
You are going to receive a 1099 at the end of the year showing you made a gain.
Now you are in a position for a lawsuit, taxable events and a whole slough of financial hardships.
The only way to possibly get out of this scenario is if you are insolvent and you can prove beyond a shadow of a doubt that you cannot repay the debt.
Now you're forced into bankruptcy and you now face more financial hardships than you started with.
On the other hand if you are using a purchase money loan and you are forced into the same scenario of a short sale or loan modification you are not on the hook for the banks loss.
I'm not saying that you should never refinance but you need to know why.
If you are living on liquid equity squeezing every dime out of your home's equity then you know you've created a financial nightmare.
You have been living in a world where money appeared almost magically especially if you lived in California.
Appreciation made equity seem as if it was never ending and then the worst happened.
Some savvy marketers created an awesome campaign on adjustable loans that enticed people to buy homes far out of reach, created a frenzy of refinances in the market place.
So now you've given up your protection from recourse and you are faced with some huge tax burdens.
There are only so many chances for finding a way to pull money out of your home.
Now that you have run out of equity, appreciation is gone and you're under water you're faced with many choices for help.
The one thing that's failed to be mentioned is the TAX consequence.
Be aware of your situation and make your financial choices wisely.
Seek out the assistance of qualified professionals for guidance.
Your financial house must remain in order no matter what.
It's your life and your future why spend it worried about money and consequence when you can worry about the finer things in life.
Tax consequences don't go away just by ignoring them, the IRS will garnish your wages and that can have an effect on your over all take home pay, your quality of life and even your employment.
You know as well as I that Uncle Sam always get his cut first.
Money isn't everything, however keeping every sliver of it you can is! Wealth is a concept of it's not how much you make it's how much you keep.
Know your position and tax consequence before you make a choice that can have a negative effect on your life.