> Does their mortgage balance increase too kind of like they took a loan out?
Yes. You are getting a new, larger mortgage, that will first pay off the previous mortgage and any extra will be paid directly to you. However, the new larger loan is equal to the price to pay off the mortgage plus the extra money.
The benefit is just like any other loan, that you get $30,000 now, instead of having to save $30,000 over a long period of time.
A mortgage isn’t just the bank loaning you money… a mortgage is the bank loaning you money *with your house as collateral.* If you don’t pay your mortgage, the bank can take your house. They consider this to be a very safe bet, so they’re willing to lend you hundreds of thousands of dollars at a very low interest rate.
If the value of your home goes up, the bank is willing to lend you more money… because they know if you don’t pay it back, they can then take your house.
Put $100K down on a house priced at $242K four years ago. Refinanced this Spring, with a loan rate almost a full percent less but house was now appraised at $350K. The original $142K had been paid down to $132K so…
Remaining mortgage = $132K
Plus cash back of $66K
New mortgage of $198K
With home appraised at $350K and a new mortgage of $198K, we still have $152K in “home equity”. But of course $100K of that is because of our large down payment of $100K. On top of that, homes in our area sell within days of going on the market, some at fixed prices and some going to the highest bidder which usually end up at $10K to $20K over appraised value. I would not want to have to buy a house in this crazy market!
Here an example of how it works:
– I own a house worth $500k, with mortgage balance of $250k at 4%
– I decide to refinance to get a lower rate, now getting a rate at 2.8%
– While my current mortgage balance is only $250k, I choose to get a $300k mortgage.
– I now have $50k in my hand, with a larger loan. But it’s still well below the 80% loan to value.
– My payments are probably about the same, larger balance but lower interest rate.
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