How does a cash out refinance work?

[Devlin Melvin]

Since numbers help me lets give an example. I buy a 100k house using a 20k downpayment and over a period of a few years i pay down 20k of the loan. So i have 20k in equity. But at the same time the homes value has gone up to 200k. The bank will give me a new loan for 75% of my homes new value or 200k*.75= 150k.

So i take out the new loan of 150k and payoff my existing loan of 80k which leaves 70k in cash. But did I actually make 50k in cash if i take 70k-20k downpayment? Do i still have the 20k of equity somewhere? What happens to that equity or did i just convert it to cash? Thank you

[Brian Sparr]

Hi @Devlin Melvin - let me break it down like this...

At the time of purchase:
- $100k value
- $80k loan balance
- $20k down payment (which is your equity on day 1)

A few years later:
- $200k value
- $60k loan balance (because you've paid down $20k of it)
- $140k equity (your $20k down payment + $20k loan paydown + $100k appreciation)

After the refi:
- $200k value
- $150k loan balance
- $50k equity still in the property
- $90k cash out