The Quick Read: A cash-out refinance pays the private lender at closing, and the title company then records the paperwork that clears the lien from your title. Because the note usually was not part of your original purchase financing, the new loan is treated as a cash-out refinance even if you take no cash. On a one-unit primary home, that means leverage tops out at 80% of value, subject to lender guidelines and full file review. Your equity, a written payoff statement, and a cooperative note holder decide whether it works.
Key Takeaways
- A private note that is recorded against your home is a lien. Paying the debt is one step. Getting the lien released is a second step.
- A payoff of a non-purchase-money private lien is generally classed as cash-out, even when no cash comes to you.
- Cash-out leverage is lower than rate-and-term leverage. The first mortgage, the note, and the costs all have to fit under the cap.
- The exception: a seller carryback that financed your purchase can be paid off as a limited cash-out refinance.
- Ask the holder for a payoff statement and a signed release before closing. Verify the recorded release afterward.
What Does It Mean to Release a Recorded Private Note?
Releasing a recorded private note means two things happen. The debt is paid in full, and the lien against your property is cleared from the public record.
Those are different documents. The note is the promise to pay. The deed of trust or mortgage is the recorded security instrument that ties that promise to your house. Paying the note does nothing to the county record on its own. Until a release (called a satisfaction in some states and a reconveyance in others) is signed and recorded, the lien can still show on title. A new first-mortgage lender will not fund over it.
That is why a cash-out refinance fits this problem. The new lender needs first position. The title company collects your payoff, wires the note holder from closing funds, and arranges for the release to be recorded. Many homeowners end up here when the private loan was a family loan, a business or settlement loan, or a balloon note coming due. Lendmire arranges cash-out refinance programs through wholesale lenders for this kind of file, and in the files that fit, the sequence is the same: identify the lien, classify the loan, get the payoff, close, verify the release.
Key Terms Defined
Private note: A loan from an individual or private company instead of a bank, documented by a promissory note.
Recorded lien: A claim filed in the county land records that ties the debt to your property.
Release (satisfaction or reconveyance): The signed document, recorded with the county, that clears the lien after payoff.
Payoff statement: A written figure from the note holder showing what it takes to close the debt on a given date.
Per diem: The daily interest added to a payoff figure for each day past the statement date.
Purchase-money: Debt that was used to buy the home, such as a seller carryback.
Limited cash-out refinance: A rate-and-term refinance that pays off the first mortgage, closing costs, and a purchase-money second, with only incidental cash back.
Resubordination: A recorded agreement in which the private lender agrees to stay behind the new first mortgage.
Which Kind of Private Note Do You Have?
Start by sorting your situation. The paperwork that proves payoff changes with the note.
| Your note | Proof of payoff | Who signs | Recorded? |
|---|---|---|---|
| Recorded lien (family, business, settlement) | Payoff letter plus release | Note holder | Yes, release recorded |
| Seller carryback from your purchase | Payoff letter plus release | Former seller | Yes, release recorded |
| Unrecorded note (handshake or paper only) | Signed release or paid-in-full note | Note holder | Usually nothing to record |
| Note held by a partner or relative | Payoff letter plus release | That person | Yes, if a lien exists |
Pull a title search to see which row you are in. An unrecorded note may not be a lien at all, and that changes how the lender treats it. The title company can confirm.
Why Does a Private Note Make the Refinance a Cash-Out?
The deciding question is whether the note financed your purchase. Under Fannie Mae’s Selling Guide on subordinate financing, paying off a purchase-money second with no cash out is a limited cash-out refinance. Paying off a second lien that was not part of the purchase is a cash-out refinance, whether or not you take extra cash.
So a family loan taken out years after you bought is cash-out. A seller carryback from your original closing may be limited cash-out. That difference matters, because limited cash-out runs up to 95% LTV (loan-to-value, the loan as a percentage of the home’s value) on a one-unit primary home. Cash-out runs lower.
Two more points from the same guidance:
- The note must be real. Subordinate financing needs a promissory note, a recorded security instrument, and clear junior status to the first mortgage.
- The cash-out section of the Selling Guide lists paying off subordinate liens of any age as an acceptable use. The 12-month seasoning rule applies to the first mortgage being paid off, not to the private note.
Many borrowers assume a lien that is only a few months old blocks the plan. It usually does not. A first mortgage that is too new is the more common seasoning problem.
How the Loan Is Underwritten, Step by Step
Here is the sequence across the wholesale programs Lendmire places files with.
1. Identify the lien. Pull the title search. Gather the promissory note and the recorded deed of trust or mortgage. Both matter.
2. Classify the loan. Was it purchase-money? That decides limited cash-out versus cash-out, and so the leverage cap and pricing tier.
3. Request a payoff statement. A private holder has no servicer, so you may have to help. Ask in writing for the payoff figure with per diem, wire or payee instructions, and a signed commitment to release on receipt of funds.
4. Order the appraisal. The appraised value sets how much room there is. The first mortgage balance, the note payoff, and the closing costs together must fit under the cap.
5. Underwrite the file. The lender reviews credit, income, and reserves. Conventional wholesale programs start at a 620 decision score, and the automated finding governs most files, with a 50% total ratio ceiling. Retiring the note’s monthly payment can improve your ratio.
6. Close through title. The title company pays the holder from closing funds. Your Closing Disclosure shows the payoff as a line item.
7. Verify afterward. Confirm the release was recorded, get a recorded copy, and keep it with your closing papers.
A short request to the holder can cover step 3. Ask for the payoff date, the balance, per diem, any exit or minimum-interest charge or default interest, wiring instructions, and a signed release to be held until funds land. Those extra charges lower what you net, so ask for them up front.
How Much Equity Do You Need?
Enough that the whole payoff fits under the cap. Conventional cash-out leverage depends on occupancy, per the Fannie Mae Eligibility Matrix and the wholesale programs that follow it.
| Property | Cash-out LTV cap |
|---|---|
| One-unit principal residence | 80% |
| Two- to four-unit principal residence | 75% |
| Second home | 75% |
| Investment property | 75% |
If your home is a rental or second home, the lower cap applies and occupancy decides the leverage. That is all this page covers on that point.
Seasoning applies too. The first mortgage being paid off should be at least 12 months old, and you should have been on title for six months. Exceptions exist for delayed financing, inheritance, and legal awards.
One wholesale lane reaches 89.99% LTV with no mortgage insurance on a primary residence, at a 680 score and a 50% ratio on a thirty-year fixed. It has its own six months of seasoning. Whether a lane allows a private-note payoff is a file-level question, and everything is subject to lender guidelines.
Thin equity is the usual reason this plan stalls. The honest read: if the first mortgage, the note, and costs land above the cap, the options are paying down the note first, waiting for value to grow, or leaving the note in place.
Where the Rule Bends: Edge Cases
Seller carryback. This is the main exception. A note that financed your purchase can be paid off as a limited cash-out refinance, with the higher leverage and only incidental cash back.
Recently purchased home. The delayed financing exception, found in the same cash-out section of the Selling Guide, lets a cash-out refinance happen within six months of purchase, with conditions. The original purchase must be arm’s-length, and you must document where the purchase funds came from. Lenders apply these conditions file by file.
Family or affiliated lender. Relationships can draw underwriting scrutiny and may affect whether a note counts as a bona fide lien. Expect more documentation.
Manufactured housing. Cash-out caps are much lower, so the equity test is harder.
Texas homestead. The state constitution limits how much cash a borrower can take out of a homestead, so confirm the current cash-out limit with the lender or title company before planning a payoff.
Government loans. An FHA Streamline refinances an existing FHA loan and is not the tool for retiring a private note. A VA IRRRL refinances an existing VA loan and does not take equity out or pay other debts. A VA cash-out refinance can pay other liens. Check current rules with HUD and the VA.
Leaving the note in place. If the private lender stays, the new first lender requires a recorded resubordination agreement. Title insurance does not replace it. Paying off the note avoids needing the private lender’s cooperation to subordinate.
What Happens at Closing, and the Rule That Affects It
Because a cash-out refinance on your primary home is secured by your dwelling, you get a right to cancel. The CFPB explains the right of rescission: you have three business days to cancel. The clock does not start until you sign the note, receive the Truth in Lending disclosure, and receive two copies of the rescission notice.
In practice, funds typically are not sent to the note holder until that window ends. Ask your loan officer how the lender handles it. The right applies to a principal dwelling, not an investment property.
Your Closing Disclosure shows the note payoff as its own line, so you can check that the right amount went to the right party.
When It Goes Wrong
- The holder is unresponsive. Send the request in writing, then follow up in writing. Bring in the title company early. If the holder will not cooperate, an attorney may need to help.
- The release is late or wrong. Your closing papers should show the payoff. Ask for a corrected release with the right recording references: date, instrument number, and book and page.
- The original note is lost. This is a document problem, not a debt problem. A signed lost-note statement plus the release usually carries the weight, though title companies set their own requirements.
- The note was sold. The holder you know may no longer own it. Ask the title company to confirm who holds it before closing.
- The balance is disputed. Get the figure in writing and resolve it before the closing date, not after.
Deadlines and forms for recording a release differ by state and county. Check your own recorder’s office and state law instead of assuming one national rule.
A Worked Example With No Dollar Figures
Say you own your primary home with a first mortgage. Some time after buying, a relative lent you money, and that loan is recorded as a second lien. You want one payment and a clean title.
The lender classifies the refinance as cash-out because the note was not purchase financing. The appraisal comes back. The first mortgage, the note payoff, and the costs together add up to a percentage of value. If that percentage sits at or below 80% on a one-unit primary home, the numbers can work, subject to lender guidelines.
Now say a second homeowner has an unrecorded note from a friend. There is no lien, so there is nothing to record. The title company still wants a signed paid-in-full release from the friend, and the lender wants the debt documented before it counts the payoff.
Same goal, different paperwork.
What the Decision Looks Like in Practice
Paying off the note removes a second obligation and may replace an interest-only, balloon, or irregular structure with one payment. What it does to your monthly budget depends entirely on the new first-mortgage terms.
The tradeoff is leverage. You move into cash-out limits and give up the lower-leverage treatment you might have had on a pure refinance. If equity is thin, keeping the note and resubordinating it may be simpler. If equity is solid, retiring the note cleans up your title.
Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
Weighing Your Options
If you are weighing a cash-out refinance against keeping the loan you have, Lendmire can help you compare the programs and the equity each one reaches. Call 828-256-2183 or request a quote through the site.
Frequently Asked Questions
Can I release a private note myself?
Only the note holder can sign a release. You can prepare the request, supply the recording references from your title search, and push for delivery. A title company or attorney can draft the release for the holder to sign.
Do unrecorded notes need a release?
There is no lien to clear, but you still want a signed paid-in-full statement or the cancelled original note. A lender will want that proof, and so will you if the debt ever resurfaces.
Does paying off a private note always count as cash-out?
Usually, when the note was not part of your purchase financing. A seller carryback that financed the purchase can be paid off as a limited cash-out refinance, subject to lender guidelines.
Does the 12-month seasoning rule block the refinance?
No. That rule applies to the first mortgage being paid off. Subordinate liens of any age can be paid off in a cash-out refinance.
What if the holder won’t sign a release?
Put your request in writing and give the holder the payoff figures. Ask the title company to help. If the holder still refuses, an attorney can explain your state’s options for compelling a release.
For your own numbers, request a scenario review with Lendmire.
About Lendmire
Lendmire — NMLS# 2371349 — is a mortgage broker that arranges FHA, VA, conventional and jumbo home purchase and refinance financing in 16 states through wholesale lenders. Every option is subject to the lender’s guidelines and full underwriting. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
1. Fannie Mae Selling Guide B2-1.2-04, Subordinate Financing
2. Fannie Mae Selling Guide B2-1.3-03, Cash-Out Refinance Transactions
3. Fannie Mae Eligibility Matrix
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 Close a Large Cash-Out Refinance Without Conditions · How to Apply for a Cash-Out Refinance as a Retiree Living on Assets · Can You Use a Cash-Out Refinance to Fund Your Business?
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Legal disclosures. Lendmire (NMLS# 2371349) is a state-licensed mortgage brokerage that arranges financing through wholesale lender relationships. Lendmire is not a direct lender, depository institution, or registered financial advisor. The discussion above is general informational content about real estate financing — it is not financial, legal, or tax advice, and readers should consult licensed professionals for guidance on their individual circumstances. Loan inquiries are subject to lender underwriting; this article does not represent a commitment to lend. Loan terms, rates, and qualification standards vary by borrower, property, and state, and are subject to change at any time. Equal Housing Opportunity. NMLS Consumer Access: nmlsconsumeraccess.org.