The simplest answer is that a mortgage refinance works by giving the borrower access some of the equity in the property. This is the amount of value in the home the borrower owns (the rest of the value is covered by the loan itself). The borrower can use that equity to reduce the interest (and/or the term) of the loan by refinancing into a new, cheaper loan and paying off the old one. Or they can convert their equity to cash to use for home improvements or anything else. Or both.