It sounds as if you have a legal non-conforming use. Essentially, your existing structure is "grandfathered" in. The concept is that even though the zoning has changed to commercial, where your home was once legal, they won't make you tear it down and they'll allow it to be maintained as long as it is standing. You won't be able to add onto the structure or "expand the non-conformity." Likewise, you won't be able to re-build if it is mostly demolished, because they are really trying to phase out the residential homes and turn the area into commercial. I'm not sure what to suggest to you, other than (1) explore a zone change back to residential or something in between which would allow residential structures with the City; or (2) work with the lender - if they loaned originally under these circumstances, a refinance should not adversely impact the lender's interests. Perhaps if there is the ability to rebuild a bed and breakfast, for example, in that zone, you could appease both entities and get your place refinanced. If you are unable to work through this yourself, I recommend hiring competent local counsel who handles land use matters and is familiar with the City officials involved in the decision-making process, and who handles real estate/commercial matters and would be able to negotiate on your behalf with the lender. Good luck.
I am licensed in the States of Idaho and Washington, posting a response to your question or issue does not create an attorney-client relationship, and I AM NOT providing you legal advice. I am providing only a general response to which you should follow up with competent local counsel. Only with the establishment of that relationship, can you provide licensed counsel with all pertinent facts and obtain an answer which will be tailored to your situation in your jurisdiction.