Image source: Getty Images Some homeowners who refinance a mortgage get a new loan that equals the amount they owed on their previous loan. But that's not the only option. Those who do a cash-out refinance can borrow more than their existing loan balances and take the excess money as cash to spend as they please.The latter move is one a lot of borrowers made in 2020. Last year, homeowners cashed out a whopping $152.7 billion in home equity. That's a 42% increase from 2019 and the highest level of cash-out refinancing on record since 2007, according to Freddie Mac. But while an uptick in cash-out refinancing activity is a good thing in some regards, it can also be problematic.Why the increase?The option to do a cash-out refinance hinges on having enough equity in a home to make that possible. Equity is the portion of a home an owner owns outright. For example, a home worth $400,000 with a $300,000 remaining mortgage balance leaves its owner with $100,000 in equity.When home values rise, equity tends to follow suit, and that's precisely what happened last year. Normally, economic recessions cause a decline in home values, but this downturn proved to be an exception. In fact, home values soared during 2020 as record-low mortgage rates and limited housing inventory drove prices up.In December of 2020, the median existing home price climbed to around $310,000. That represented a 13% jump from December of 2019. All of that added equity helped more borrowers qualify for cash-out refinance -- and many opted to take advantage of it.A mixed bagCash-out refinancing can be an extremely affordable way to borrow, especially when mortgage rates are as low as they were throughout the latter part of 2020. What's more, homeowners with large amounts of equity were able to use cash-out refinancing to create financial security in the face of a shaky economy.But there's a danger in going the cash-out refinance route. Borrowers take on larger mortgage payments in the process, and those who fall behind risk losing their homes. It's common to do a cash-out refinance to consolidate or pay off unhealthy debt (such as that of the credit card variety). But borrowers who take cash out of their homes can use that money however they please -- there are no restrictions. As such, some borrowers might use that money irresponsibly, all the while adding to their debt and increasing their monthly payments.In fact, last year, many borrowers used cash-out refinancing to fund home improvement projects -- a trend fueled by lots of people stuck at home with extra time on their hands. That doesn't exactly qualify as frivolous spending. After all, renovations can improve a home's value and score its owners a higher sale price once they're ready to sell. But it's feasible that some borrowers may have taken too much cash out of their homes to renovate and are now stuck with higher monthly mortgage payments as a result.The fact that home values have risen is a good thing -- it gives the people who own them more borrowing options and buys them more financial security. To see that there was an increase in cash-out refinances last year isn't shocking, and that very well may continue into 2021. The fear, however, is that some borrowers will get in over their heads and, as with any type of debt, fall behind and suffer the consequences.A historic opportunity to potentially save thousands on your mortgageChances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase. The Ascent's in-house mortgages expert recommends this company to find a low rate - and in fact he used them himself to refi (twice!). Click here to learn more and see your rate. While it doesn't influence our opinions of products, we do receive compensation from partners whose offers appear here. We're on your side, always. See The Ascent's full advertiser disclosure here.We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.Source