The Quick Read: Yes, in most cases. A new first mortgage on a home you own outright is treated as a cash-out refinance, and the proceeds can generally pay off a private note. The catch is that the loan is underwritten as cash-out, so leverage is lower and the file is reviewed in full, subject to lender guidelines. Nothing here is a commitment to lend.
Why a Paid-Off Home Still Counts as a “Refinance”
Nothing is being paid off, so the name sounds odd. But the industry treats any new first mortgage on a home with no mortgage as a cash-out refinance. Fannie Mae’s Selling Guide says a cash-out loan can be a new mortgage on a property with no existing mortgage lien.
Across the wholesale programs Lendmire works with, the label matters for one reason. Cash-out sits in a different box than rate-and-term. The rate-and-term route is built to pay off an existing first mortgage, with only incidental cash back. A free-and-clear home has no such loan to replace, so it does not fit.
That rate-and-term door is closed here. Even a private note taken out after you bought the home pushes the file into cash-out, because only purchase-money second liens qualify for the limited version.
What Is a “Private Note,” Exactly?
“Private note” is not an agency term. Read it as a loan from a person or private company rather than a bank: a relative, an individual lender, or a short-term private lender. Two details change how the file works:
- Secured: The note is recorded as a lien against your home. Title work will find it, and it must be paid and released at closing.
- Unsecured: The note is a promise to repay with no lien on the home. There is nothing to release, but the lender will still want to see what the proceeds are doing.
Many owners call a home “paid off” while a recorded private lien sits on title. Lenders see that lien. At that point it is not a free-and-clear file in the strict sense, and it stays a cash-out.
Can the Proceeds Actually Pay a Private Note?
Generally, yes. Paying a private note is a permitted use.
Here is the honest limit. No agency rule spells out the paperwork for paying off an unsecured private note, so the lender decides what the file documents. Expect to provide the note itself, a payoff statement, and a clear picture of who gets paid.
How the Payoff Works at Closing
For a secured note, the sequence looks like this:
1. You apply, and the lender orders an appraisal and a title search.
2. Title surfaces any recorded lien from the private lender.
3. The note holder provides a payoff statement.
4. At closing, the new first mortgage funds and the settlement agent pays the note holder.
5. The note holder releases the lien, and the new mortgage takes first position.
For an unsecured note, step 5 disappears. You can have the settlement agent pay the holder from proceeds, or take the cash and pay separately. Paying through closing leaves a cleaner paper trail. Ask the note holder up front whether a prepayment charge or exit fee applies, because that changes the payoff figure.
How Much Can You Borrow?
Leverage is the part that trips people up. Across the conventional programs we place, cash-out on a one-unit principal residence tops out at 80% loan-to-value (LTV). LTV is the new loan divided by the home’s appraised value. Two- to four-unit homes, second homes, and investment property sit at 75%.
Fannie Mae’s Eligibility Matrix publishes the same caps by occupancy. Programs change, so treat any figure as subject to lender guidelines and full file review.
Here is what that means in practice. Say your home appraises well above the note you owe. At 80%, the new loan can reach four-fifths of the value. Your note must fit under that ceiling, with room for closing costs. If the note is large against the home’s value, the cash-out cap may be the binding limit.
There is also a wholesale lane that reaches 89.99% LTV with no mortgage insurance. It requires a 680 score and a 50% ratio on a thirty-year fixed, primary residence, conforming balance. It carries its own six months of seasoning. In Texas, cash-out on a homestead is capped by the state constitution at the agency figure, so that lane is not written there. Every figure here varies by lender and program — guidelines, property type, leverage, and credit profile all apply.
Key Terms Defined
Cash-out refinance: A new mortgage larger than what you owe, with the extra paid to you or to creditors at closing.
Free and clear: A home with no mortgage or other lien against it.
Lien: A legal claim on your home that must be paid before the title is clear.
Seasoning: The waiting period a lender requires before certain loans or ownership events count.
LTV: Loan-to-value, the loan amount as a percentage of the appraised value.
Payoff statement: A written figure from the note holder showing what is owed on a given day.
Timing Rules That Can Stop the File
The seasoning rules are where owners get surprised.
- Time on title: At least one borrower generally needs to have been on title for six months before the new loan.
- Existing first mortgage: When cash-out pays off a first mortgage, that loan must be at least 12 months old, measured note date to note date. This rule does not apply to a truly paid-off home.
- Delayed financing: If you bought with cash within the last six months, an exception can waive the ownership wait. The loan is still cash-out, and the purchase must be arm’s-length. A buyer who funded the purchase with a private or hard-money note may not fit, so ask before assuming.
- Inheritance or legal award: Fannie Mae allows no waiting period for an inherited home or a legal award such as a divorce settlement.
What Lenders Review
Expect a full review, not a streamlined one. Lenders look at:
- Value: The appraisal against the cash-out leverage cap.
- Credit: The wholesale conventional programs we use start at a 620 decision score, and the automated finding governs most files.
- Ratios: A total debt-to-income ceiling of 50% on automated approvals. Manually underwritten loans run 36% or 45% with extra reserve and score factors.
- Reserves: Fannie Mae’s automated rules call for six months of reserves when the ratio exceeds 45%.
- Title and the note: Any lien, who holds it, and what the proceeds will do.
Lenders must also make a good-faith determination that you can repay the new mortgage. Your income, debts, and the new payment all get documented.
What Changes in Your Budget
A private note is often interest-only or ends in a balloon, meaning one large payment at the end. A mortgage is different. It amortizes, so each payment reduces the balance over time. That is a change in structure, not just a smaller or larger number.
The bigger shift is risk. A home with no debt now carries a first mortgage. If the private note was costing you more than a mortgage would, the swap can make sense. If you could pay the note from savings, it may not.
Also budget for taxes and insurance, which are usually escrowed. Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
Does a Government Streamline Help?
Not here. An FHA Streamline refinances an existing FHA-insured loan. A VA IRRRL refinances an existing VA loan and allows no cash out. A paid-off home has no such loan to refinance.
A veteran with no VA loan would use the VA cash-out route, which involves full underwriting and an appraisal. FHA also allows cash-out on a free-and-clear home, but the current leverage limit should be confirmed against the HUD Handbook before you rely on it.
Cash-Out Refinance or Another Path?
Cash-out is not the only way to clear a private note. Here is how the choices compare.
| Option | Best fit | Main tradeoff |
|---|---|---|
| Pay from savings | You have the cash | Drains reserves |
| Cash-out refinance | Large note, steady income | New first mortgage |
| HELOC | Smaller or flexible need | Variable terms |
| Extend the note | Holder agrees | Cost may stay high |
If you are weighing a cash-out refinance or a HELOC to pay a private note, it is worth comparing the two side by side.
Lendmire’s cash-out refinance programs are arranged through wholesale lenders, so one application can be compared across several.
Where These Files Break
- An unrecorded note: Paperwork is thin, so the lender wants more proof before treating it as a payoff.
- A value shortfall: The appraisal comes in low and the 80% cap no longer covers the note plus costs.
- A recent purchase: You are inside six months on title with no exception that fits.
- A hidden lien: Title shows a claim you forgot about, and it must be cleared first.
- High ratios: The new payment pushes your debt ratio past what the program allows.
Most of these are fixable early. A title search before you apply surfaces liens before the lender does.
Frequently Asked Questions
Is a paid-off home really treated as cash-out?
Yes. The limited rate-and-term version only applies when an existing first mortgage is being replaced.
Can I use the money for any purpose?
Generally, yes. The lender still documents the file, so expect to show the note and a payoff statement.
Does the private note have to be recorded against my home?
No. It can be secured or unsecured. A secured note must be paid and released at closing. An unsecured note leaves no lien, but the lender decides what paperwork it needs.
What if I bought the home with cash recently?
Fannie Mae has a delayed financing exception for cash purchases within six months. It waives the ownership wait only, and the loan remains cash-out. If the purchase was funded by a private or hard-money note, the exception may not apply.
Can I use an FHA Streamline or VA IRRRL?
Not on a home with no loan. Both programs require an existing FHA-insured or VA-guaranteed mortgage. A veteran without a VA loan would look at VA cash-out instead.
If you are weighing a cash-out refinance on a home you own outright, Lendmire can help you compare the programs and the equity each one reaches.
For your own numbers, request a scenario review with Lendmire.
For current guidelines and terms, see Lendmire’s refinance programs page.
About Lendmire
Lendmire, NMLS# 2371349, is a mortgage brokerage with consumer lending licenses in 16 states. FHA, VA, conventional and jumbo purchase and refinance loans are arranged through wholesale lending partners, and each application is reviewed individually by the lender. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
1. Fannie Mae Selling Guide B2-1.3-03, Cash-Out Refinance Transactions
2. Fannie Mae Eligibility Matrix
3. HUD
This article is part of Lendmire’s Refinance series — every loan program’s qualification details, guidelines, and scenarios live on the loan options page.
Related reading: How to Remove Your Ex From Title and Note With a Cash-Out Refinance · Can You Cash-Out Refinance a Free-and-Clear Home for a Second Home? · How to Retire a Private Note With a Cash-Out Refinance
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Disclosures. The information presented in this article is general market commentary, not financial, legal, or tax advice. Lendmire is a mortgage brokerage (NMLS# 2371349) — not a direct lender or depository institution — and loan placement is subject to lender underwriting. Nothing in this content represents a commitment to lend. Loan terms, pricing, and program availability vary based on borrower qualifications, property characteristics, and state of subject property, and are subject to change at any time. Lendmire complies with Equal Housing Opportunity requirements. Consumer access: nmlsconsumeraccess.org.