I had intended two more posts to this thread for the benefit of ciola and others. But since ciola seems to have found some additional counsel elsewhere, I want to add just one more topical addition in the interests of completion.
This concerns the topic of subrogation.
Subrogation is an equitable concept and can arise in a variety of ways.
One classic way that subrogation arises is within the context of a guaranty.
Suppose that A borrows money from B, but that B requires a personal guaranty of the loan by C due to A's poor credit, the perceived risk of the loan, etc. Further suppose that A later defaults on the loan and B looks to C to make good on payment. When C pays the amounts due to B on A's behalf, usually B's loan to A is said to become subrogated to C and C has a right to collect the amount C has advanced on A's behalf (to the extent that this is collectible, etc.).
Note that A didn't really borrow any money to C. Neither did B necessarily negotiate A's note to C, though a guaranty workout can be structured that way (C pays B the balance and B negotiates the note to C). Even without such a negotiation, though, at equity, C would usually have a right to step into B's shoes to collect from A through subrogation.
A similar circumstance might sometimes arise in respect of a refinance transaction. Suppose that A owes B on a note and mortgage. A approaches C to refinance the loan and C advances the funds, paying off B. Further suppose that C errs in obtaining a valid note and/or mortgage in respect of this new indebtedness. When C seeks to collect, A refuses to pay or A otherwise defaults in payment.
In this latter situation, in a suit to re-establish the debt C would usually allege that C paid off A's loan to B and is entitled to step into B's shoes through subrogation and is entitled to collect from A despite the other defects in the note or mortgage instruments. This argument also might arise in respect of some question as to priority in respect of another subsequent loan and mortgage to D.
Without resolving any of these particular examples, suffice it to say that subrogation is a legal concept that exists. But there are also certain limits to its application.
Suppose that A borrows money from B, giving in return a note and mortgage. Further suppose that C, a stranger to the transaction voluntarily pays off A's balance without either purchasing the note from B OR being solicited by A to refinance A's loan.
In this situation, can C rightfully claim subrogation? Usually NOT, though this would certainly be fact dependent and outcomes might vary depending upon both statutes and case law from place to place.
A's argument is going to be that C is a stranger to the transaction, that C made a voluntary contribution on A's behalf, that A did nothing to induce or defraud C into making this payment, etc.
C's argument might be that C had mistakenly made the payment to B, that there was a mutual mistake as to fact, that the transaction should be subject to rescission, that failure to recognize subrogation will result in unjust enrichment, etc.
Such a case might turn of some subtle nuances as to facts.
Permit me to present a totally different example by way of analogy. Parking meters in a particular jurisdiction charge $0.25 every fifteen minutes. The charge for an overtime parking ticket is $50.
Suppose that A parks his car, neglecting to put money in the meter. B has a business that involves making voluntary contributions just ahead of the meter maid to help overtime parkers avoid tickets. B advances $0.50 to help A avoid getting a ticket. Then B takes down the license number of the car and puts an envelope on the window asking that A repay B $10.
A certainly benefits from this service of B's. If A pays B $10, then A saves $40 and B profits by $9.50. Suppose though that A declines to pay B. Can B bring a valid cause of action against A for his injury?
If so, is B entitled merely to the return of the $0.50, to the payment of $10, or the amount A has benefited ($50)?
I think that everyone can probably agree that under these circumstances while it might be nice if A pays B the $10 or at least the out of pocket expense of $0.50 that A is probably under no compulsion to do so. A has never agreed to participate in B's service. B made a voluntary contribution to A's parking meter, etc.
Compare the outcome where B goes to the bank and intending to deposit $50 into his own account erroneously puts A's account number on the deposit slip.
In the former instance B was making an intentional and willful payment of the parking fee for the spot occupied by A's car. In the latter case, B simply made a mistake.
Equity would tend to require that the bank correct the application of funds. And if the bank failed to do so (as when A withdraws the $50 and flees to Tahiti with his unexpected windfall), B might be able to bring a successful action against A for restitution.
The reason for my exposition is that the circumstances described by ciola present a rather interesting equitable situation as to possible subrogation for which the outcome is unclear.
Suppose that A, B and C borrow $100,000 cash purchase money from D at 6%, giving in return a mortgage (or deed of trust) in respect of a jointly owned property.
Later, A and B (without C's participation and assent) approach E about refinancing this loan. Suppose that A and B refinance exactly the outstanding balance ($95,000) at a lower interest rate (4%), that E advances the funds to D and obtains a note and mortgage from A and B only.
In this circumstance, E has a fairly strong subrogation argument against C's interest. C can hardly complain that C has been prejudiced by a loan of the outstanding balance only at a better interest rate.
In this situation, a court might very well find that there exists a subrogation and that E is entitled to the same lien C executed in favor of D.
By contrast, suppose that A and B borrower a much larger loan amount ($200,000) from E at a less favorable interest rate (10%) without obtaining C's consent to the payoff of the original loan OR the larger balance, in which C does NOT share. Does this latter loan entitle E to subrogation as to D's interest in the lien. Common sense and equity suggests not OR, at least, that C's interest not be prejudiced in excess of the original loan amount.
This latter situation can get cloudy quickly. C has a fairly strong argument that C has been prejudiced not only by the larger loan amount, but by the substitution of a less favorable interest rate and/or more onerous payment terms to which C NEVER agreed. While A and B are far from blameless in this situation, the legal question is whether equity will admit the imposition of a subrogation as to the valid lien that C actually gave to D.
With a good lawyer, C has a fairly strong case that A and B, acting in concert with E CANNOT possibly bind C to the new loan or subrogate C's prior lien in favor of D to E, a stranger to the original transaction.
Of course E is going to make the traditional arguments that E is entitled to step into D's shoes and argue that C would be unjustly enriched should it be deprived of the lien. On the other hand, C can argue that E made a voluntary contribution paying off C's loan to D, that D did nothing to deceive or induce E to enter this transaction and even that C expressly WARNED E of C's interest and C's UNWILLINGNESS to go forward with this loan.
Since subrogation is an equitable concept, E can hardly claim to be blameless in this transaction.
Overall, I think that ciola has a reasonably good prospect of a pretty good outcome, however ciola needs to make certain that ciola is viewed as doing the UPRIGHT thing. Also, a sooner default may be EASIER for the lender to litigate, while a later default, particularly AFTER the death of one or both of ciola's parents could prove to be exceptionally problematic for the lender!
To the extent that ciola's parents are extremely elderly and/or in poor health and the loan is for an exceptionally long term, I would generally tend to try to tough it out at least until one of ciola's parents DIES. The lender probably couldn't do a successful non-judicial foreclosure in any case as to ciola's interest. The lender is going to need to go into court to re-establish the note and deed of trust using a subrogation argument.
Trying to foreclose on a deceased person or an estate presents other complexity. If the ownership is joint with a right of survivorship (as discussed above), ciola might succeed to the interests of one or both parents BEFORE a default.
The bottom line is that the answer is going to be both fact dependent as well as dependent upon unique case law of the jurisdiction.