eli5: What is cash-out refinancing and why did so many homeowners choose to do this during 2020-2021? Also, are there any hidden dangers in this type of refi that are less talked about?
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It was a way to get a lower interest rate on their mortgage AND pull out some equity to remodel, add a deck, install a pool. Say they have a mortgage at 4.5% and owe $200k on a home bought for $400k. They take out a new mortgage at 3% for $250k, meaning they now have $50k to spend on a new kitchen. It drops their equity from 50% to 38%, but new kitchen will also boost home value, their monthly mortgage payment goes up only a little because of the lower rate.
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