Should I do a cash-out refinance? When it makes sense.

If you're a homeowner, a cash out refinance allows you to tap into your home equity through either a fixed rate or adjustable rate mortgage and may also help you secure a lower interest rate on your existing loan. Wondering whether a cash out refinance makes sense for you? Be sure to consider your financial goals and overall situation before deciding.

What a cash-out refi does — and why timing matters

A cash-out refinance pays off your existing mortgage, replacing it with a bigger one. In exchange, you get additional funds in the form of a lump sum.

Depending on the timing of your refinance, you may also end up with a different interest rate and repayment period. Ideally, the interest rate on the new mortgage will be lower than what you had before and the repayment term will work for your budget. A shorter term typically means a higher monthly payment while a longer term usually means a lower payment, but more paid out of your pocket in the long run.

Timing is key when deciding to refinance your home loan. Ideally, you want to strike when interest rates are lower, and you have enough home equity — often influenced by rising home values — to qualify for better terms.

When a cash-out refi typically makes sense

If most or all of the following apply to you and your situation, a cash-out refi most likely makes sense for you, right now:

• You have significant home equity and can stay within standard loan-to-value (LTV) ratio limits, meaning you're not going to borrow more than 80% of your home's value when you refinance. For example, if your home is worth $500,000, and you have a mortgage balance of $250,000, you could borrow up to $400,000 with a cash-out refinance to repay your original mortgage and free up a lump sum of $150,000. program restrictions and eligibility requirements may apply, so be sure to ask your loan officer for details.
• You can secure a competitive interest rate relative to your current mortgage and other debt, meaning the rate is lower than what you're paying now, such as getting a rate of 6.2% when you're currently paying 7%.
• You plan to use the cash for high-value purposes, such as debt pay-off or home improvements. Paying off loans with higher interest rates can save you money in the long run. Investing in home improvements, such as kitchen or bath updates, can boost the value of your home even higher.
• You plan to stay in the home long enough to offset closing costs. If you plan on staying in your home for the long-term, you'll likely break even after a few years.

When a cash-out refi may not make sense

On the flip side, if any of the following scenarios apply to you, then a cash-out refi most likely does not make sense for you right now:

• The new interest rate is higher than what you're currently paying: Higher interest rates typically mean you pay more over time.
• You plan to use the cash for short-term or discretionary spending: If this is the case, it may be worth considering other options, such as a personal loan or credit card, which usually have lower upfront costs.
• The refinance would strain your monthly cash flow: If a cash-out refinance will mean a considerably higher monthly mortgage payment, think about how that will impact your budget. If it's too much of a strain or you'll need to cut a lot of other expenses, it might not be worth it.
• You'd like to sell your home in the next few years: Depending on how quickly you sell, you may not break even with your closing costs. Waiting to make the sale to tap into your home's equity could be the better option.

Questions to ask before moving forward with a cash-out refi

Before you decide to refi, or not, ask yourself the following:

• Does the long-term benefit outweigh the total cost? What do you stand to gain by taking a lump sum cash payment from your home's equity? How do any cost savings compare to what you'll need to pay upfront?
• How does this change my monthly payment and loan timeline? Will you be able to afford a higher monthly payment? What about extending your loan's repayment period by a number of years? How will those changes affect your other financial goals, such as when you can retire?
• Are there lower-risk or lower-cost alternatives? A home equity loan or line of credit lets you use your home's equity but may cost less than a full refinance. A personal loan won't use your home as collateral and will likely have considerably lower upfront fees.

Tax implications can vary depending on how cash‑out refinance funds are used. Homeowners may want to consult a tax advisor to understand how using the funds could affect mortgage interest deductibility

Get started on your cash-out refi

Before moving forward, review your home equity, take a look at the total costs and get estimates based on your specific situation. If you decide you should do a cash-out refinance, take a look at what Citizens has to offer.