Maybe your coworker is getting cash out and is realizing a rate of return that is greater than the increase or decrease in home value. If so, your coworker is very smart. Considering home values have plunged in the last several years, cash could be used to reinvest in fire sale property or stocks. I would do the same thing if possible.
When you take out an amortized mortgage, they set you up with a constant monthly payment and thus the interest portion of the payment declines and the principal portion of the payment increases each month. Thus, if you refinance for the same amount several years later for the same term and at the same interest rate you will reset back to the original interest deductions obtained. Thus, you’ll lower your taxes. If you paid points for the refinance you can’t deduct this all at once but must pro-rate this expense over the life of the loan. However, when you re-finance a previously re-financed loan you do get to deduct the unused points from the previous loan all at once.
This strategy could reduce your taxes but, considering the cost to refinance, you are unlikely to put any more money in your pocket and likely will be paying more out. This could be a viable strategy if there is a significant drop in interest rate each time you re-finance. However, this requires careful calculations to be sure you end up ahead of the game.
Interesting aspect of re-financing: In most states the original mortgage for an owner-occupied house is non-recourse. This means that if the loan company forecloses on you and lose money after selling your house they cannot sue you for the shortage. All re-financed loans and second mortgages are recourse loans meaning they can go after you for additional loses.
Actually no. When you refinance the principal has gone down so the interest deductions would be the same as if you had just kept the original loan.