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wait, can you explain this to me? How does refinancing the home in this example give them a 500k windfall? eli5 plz

• shanedog 8y ago
  Assume his home was worth 1mm at the peak. He got a new loan for $750 k, paid off his old loan of ~$250k, and pocketed the difference.
  • fierro 8y ago
    right, but now he has much bigger monthly payments, and still owes that 500k back... so it seems all he did here was get a big loan....
    • diggernet 8y ago
      That is true. But then he stops making the payments. The bank either forecloses and takes the house to settle the loan, or he sells it in a short sale for $350K and the bank writes off the difference. Worst case, he has to file bankruptcy and maybe pay income tax on the amount forgiven. Either way, he still got to spend the $500K on...whatever. Now that I think about it (and these are pure anecdotes), at the time I heard tales of people using the money from refinancing to buy a smaller home with cash. Then they'd move into that and let the first house get foreclosed on (because their paid-in-full primary residence is protected in bankruptcy).