The hidden costs of taking cash out of your home

Nearly 60% of cash-out refinancings in 2018 came with higher interest rates (WSJ)

The recent WSJ article on American consumers refinancing at higher rates to take equity out of their home is yet another indication of the product-market mismatch in residential real estate financing.

Paul Thompson, the particular consumer in the piece, replaced his five year-old 4% mortgage with a 4.625% mortgage, taking out $30,000 in the process.  Some back-of-the-envelope calculation show that Paul will be paying $146,530 over the life of the new loan for the opportunity to take out $30,000 in equity.  I didn't account for time value of money or mortgage interest deductibility, but it seems that Paul will need a period of macroeconomic hyperinflation for this to make sense financially.

Showing my work (assumptions)

• He initially took out $350,000 for 30 years; total payments would have been $601,543
• Assuming 60 periods in, he would have paid down $33,433 in principal and $66,824 in interest (totaling $100,257)
• Since he took out $30,000 in equity, I'm further assuming the new mortgage balance will be $350,000
• He will have total principal and interest payments of $647,816 for his new loan.
• [New Loan: $647,816] - ([Old Loan: $601,543] - [Old Loan Paid Down: $100,257]) = $146,530