How do people get loads of money to be able to do extensions and new kitchens.
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Think of your total house’s value as a combination of what you owe and the equity. Essentially: Total Value = Mortgage + Equity.
For example, If your house can be sold for $100,000 but you owe $80,000 then you have $20,000 equity. So if you sold it you would walk away with $20,000 in your pocket, not including fees and taxes.
When you refinance a home, you can move some of that equity into the mortgage and receive that amount in Cash. You can then use that Cash to do with whatever you want.
For example, let’s say you buy a house for $100,000 and finance $80,000 of it. 10 years later the house is worth $150,000 and you’ve paid of $20,000 of the mortgage. So you now have $90,000 of equity in the house. $90,000 + $60,000 = $150,000.
You can choose to refinance the property for let’s say $90,000. You then take out a new mortgage for $90,000 and use $60,000 of that $90,000 to pay off the old mortgage so you’re still left with $30,000 cash you can then use.
But, it’s important to note that you have to pay that $30,000 back along with the rest of the mortgage. So when people do this, they usually use the money for home improvement projects that will put some of that value back into the house. So, if you spend $30,000 on a new kitchen and bathroom, that could increase the value of the house by $30,000 which would return the the equity level in the house back to $90,000.
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