How do people get thousands (or tens of thousands) when they refinance their house?

Question

I understand the price of the home has gone up since the purchase so there’s let’s say $30k in equity. How are they entitled to this $30k just magically? Does their mortgage balance increase too kind of like they took a loan out?

In: Economics

Answer 1

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.