Cash-out proceeds are calculating returns

[Ray Thomas]

How do you calculate your equity basis and returns when doing a cash-out refi? I have a lot of equity built up in my older house (<40% LTV) and would like to get a cash-out refi taking it up to a 60% LTV. Do I count the refi proceeds as equity even though it is not cash coming out of my pocket?

For example if the refi proceeds totaled $100K and my cash equity in the house is $200K is $300K my new equity basis or is it still $200K?

I would like to use that $100K to either do a major remodel, which will increase the market value of the house based on recent comps, or purchase a 2nd property.  I am confused on how to calculate the returns as I am not sure if I need to increase my $200K equity basis under either scenario? 

[Joe Villeneuve]

Equity is what you have left after you take your property value and subtract any liens (mortgages) you have on the property.  It has nothing to do with any cash you take out.  When you take out cash doing a refi, the cash you get is what's left after you pay off the original loan (it's not cash you take out actually...it's a loan that has no other place to go).

Example:

  Property Value = $100k; Existing mortgage = $50k; Refi Loan (60%) = $60k; Cash Out = $10k; 
      Equity before refi = $50k  ($100k PV - $50k Original Loan balance)
      Equity after refi = $40k ($100k PV - $60k refi loan balance)