The Quick Read: A PACE assessment that sits ahead of your mortgage generally has to be paid in full at closing, and a conventional cash-out refinance is the usual way to do it. The new loan pays off the old mortgage and the PACE balance together, and any cash left over goes to you. Whether that works depends on three things: whether the PACE lien is senior or subordinate, whether your equity covers the payoff, and whether the file holds a current payoff statement.
What Is a PACE Assessment, and Why Does It Block a Refinance?
A PACE assessment is financing for home improvements, most often solar, windows, or HVAC, that is repaid through your property tax bill. The CFPB defines PACE financing as financing for home improvements that results in a tax assessment on the consumer’s real property. It is a loan in practice, even though it looks like a tax line.
The problem for a new mortgage is lien priority. In many programs the assessment takes first position ahead of any mortgage already recorded. Under the Fannie Mae Selling Guide, these loans typically have automatic first lien priority over previously recorded mortgages, and Fannie Mae will not purchase a mortgage on a property with an outstanding PACE loan unless the program’s terms do not give it that priority. Freddie Mac says the same thing in its own words: mortgages it buys must stay in first-lien position for the life of the loan.
Most conventional loans are sold to one of those two agencies. So a senior PACE lien is not a pricing issue. It is an eligibility issue for the loan itself.
Key Terms Defined
- PACE assessment: Home-improvement financing repaid through an assessment on your property tax bill.
- Lien priority: The order in which claims on a property get paid if the owner defaults.
- Super-priority (senior) lien: A lien that ranks ahead of an existing first mortgage.
- Subordinate PACE: A PACE obligation that sits behind the first mortgage and will stay there.
- Cash-out refinance: A new mortgage larger than the old one, with the difference paid to the borrower or used to pay off other debts.
- Limited cash-out (rate-and-term) refinance: A refinance that pays off the existing mortgage and closing costs, with only incidental cash back.
- Payoff statement: A written figure from the PACE administrator showing what is owed on a given date.
The Rule in Plain Terms
For a senior PACE lien, the agencies want it gone. Freddie Mac states that a property with a lien that has or may take priority is ineligible, and that includes PACE obligations that may take first-lien priority at delinquency. If cash-out proceeds pay it off, the new loan is originated under the cash-out rules and the PACE obligation must be paid in full.
Fannie Mae’s path is similar. The lender must first try to qualify you for a cash-out or limited cash-out refinance with the PACE loan paid off as part of the deal. Borrowers with enough equity are required to pay it off as a condition of getting the new mortgage.
Two points deserve emphasis:
- No partial payoff. Paying down half the balance does not change the lien. The obligation must be paid in full.
- No keeping it and refinancing around it. Where the lien is senior, the new first mortgage would not be first. That is why most lenders will not do it.
One more detail helps. Freddie Mac’s guide lists paying off a PACE obligation among the allowable uses of a no-cash-out refinance, subject to added requirements. But that route has conditions about who owns your current mortgage. When the existing loan is not agency-owned, the cash-out refinance is the fallback.
How Does the Underwriting Work, Step by Step?
Across the wholesale programs Lendmire places consumer files with, the PACE file follows a predictable sequence. Here is the order that keeps a file from stalling.
1. Find the lien. The title search, your property tax bill, and your loan application disclosure all show it. The assessment is collected like real estate taxes and appears on your tax bill. Say so on the application. Hiding it only delays the file.
2. Classify it. Underwriting asks whether your PACE program gives the lien priority over a first mortgage. Lenders must watch state and local law on this, since programs differ. Freddie Mac wants evidence in the file that the obligation being paid off is a PACE obligation that provides for first-lien priority.
3. Get a payoff statement. Ask the PACE administrator for a current written payoff. The file typically also holds the PACE agreement and tax statements. Specific document lists vary by lender, so your loan officer will tell you what that lender needs.
4. Check the equity. The appraisal sets the value. The loan has to fit under the cash-out leverage limit with room for the mortgage payoff, the PACE payoff, and closing costs.
5. Underwrite as a cash-out. Credit, ratios, and occupancy get reviewed the same way as any conventional cash-out file.
6. Pay it off at closing. The payoff is a line item on the Closing Disclosure, funded from the new loan.
7. Confirm the release. After closing, the assessment should come off the tax roll. Check your next tax bill to confirm it.
What Leverage Does a Conventional Cash-Out Allow?
Here is the envelope, from the wholesale programs Lendmire works with. A conventional cash-out refinance reaches 80% loan-to-value on a one-unit principal residence and 75% on two- to four-unit principal residences. That matches the Fannie Mae Eligibility Matrix, which shows 80% for one unit and 75% for two to four units.
Seasoning matters too. The first mortgage being paid off must be at least 12 months old, counted note date to note date, and the borrower must have been on title for six months. Delayed financing, inheritance, and legal-award exceptions exist. Credit starts at a 620 decision score on wholesale conventional programs, with an automated ratio ceiling of 50%. All of this is subject to lender guidelines and full file review.
Here is why the equity test is the hard part. The PACE payoff counts as part of the new loan balance. A home with a modest mortgage and a PACE balance can clear 80% easily. A home with a larger mortgage and a PACE balance may not.
Picture a borrower whose home is worth a given amount, with an existing mortgage near 60% of value and a PACE balance near 8% of value. Together that is about 68%, leaving room under an 80% cap for closing costs and some cash back. Now change the mortgage to about 75% of value. The same PACE balance pushes the total past the cap. The shortfall has to come from somewhere, or the cash-out does not fit.
What Happens to Your Cash Out?
The payoff reduces your net cash. If the new loan can reach 80% of value, the PACE payoff, the old mortgage, and closing costs come out first. What remains is yours.
That is why a PACE-heavy refinance often feels like a “payoff” more than a “cash-out.” You may get little or no money back. The benefit is clearing the senior lien and replacing it with a regular mortgage, which is a different goal from raising cash.
PACE assessments are also paid annually or twice a year, typically through escrow. Once the assessment is gone from the tax bill, your escrow analysis changes. Your servicer recalculates it.
The Structures and Variations
Not every file follows the same path. These are the main variations.
| Path | When it applies | Tradeoff |
|---|---|---|
| Cash-out refinance with PACE paid off | Senior PACE, enough equity | Fits only if total balance clears the cash-out cap |
| No-cash-out refinance paying off PACE | Current mortgage is agency-owned, and the file meets added requirements | Limits on cash back; ownership of the current loan decides |
| Keep PACE (limited cash-out) | PACE is truly subordinate, or the lender allows retention | Only where the lien is not senior |
| Non-agency options | Lien is senior and the loan cannot go to an agency | Different guidelines, different terms |
The bottom row matters. A conventional loan that cannot be delivered to Fannie Mae or Freddie Mac leaves you with non-agency options. Those are outside the conventional lane, and a broker can discuss them with you separately.
Where the General Rule Breaks
Several edge cases change the answer.
Subordinate PACE. Freddie Mac says it will still purchase mortgages on properties with a PACE obligation that is, and will remain, truly subordinate. If your program is subordinate, you may not need to pay it off. Documentation proving that status becomes the whole job.
Older assessments. Fannie Mae’s guide includes a waiver tied to loans purchased before July 6, 2010, or in a mortgage pool issued on or before July 1, 2010. Few current borrowers fit it. Confirm the scope on the guide page before relying on it.
Ownership of the current loan. Fannie Mae’s limited cash-out path requires that it own the existing mortgage. If it does not, the cash-out refinance is the route.
Other occupancies. Second homes and investment property carry different leverage limits. This article covers a home you live in, so other occupancies are outside its scope.
Sale instead of refinance. The PACE lien typically transfers to the buyer, according to one county tax collector’s description. Illustrations vary by county, so check your own program’s terms.
Government-insured loans. One county page notes that Fannie Mae, Freddie Mac, FHA, and VA may not insure mortgages with PACE assessments. Treat that as a general caution rather than a guideline. FHA and VA have their own rules.
Does a Recent Federal Rule Change Anything?
It changes how PACE is originated, not how a conventional refinance treats an existing lien. The CFPB’s final rule on residential PACE financing amends Regulation Z. It makes a PACE transaction not a qualified mortgage, extends ability-to-repay requirements to PACE companies involved in the credit decision, and clarifies how mortgage creditors treat existing PACE transactions when making a new loan.
The rule did not ban PACE. Litigation over it has been reported, so current status is worth checking.
What Does the Borrower’s Decision Look Like?
Three questions drive the choice.
Is the lien senior or subordinate? Ask your PACE administrator and check the program’s terms. This decides whether payoff is required.
Does the equity fit? Run the numbers with a loan officer before an appraisal. Add the mortgage balance, the PACE payoff, and estimated closing costs, then compare the total to 80% of value for a one-unit home.
Is a cash-out the right tool? If you need only to clear the PACE lien, and you have a low-cost first mortgage you want to keep, a separate home equity loan or line of credit leaves the first mortgage alone. The tradeoff is that a second lien changes your overall structure. If your first mortgage is not agency-owned or you want a new loan anyway, the cash-out refinance is the cleaner path. Many PACE borrowers may be able to qualify for alternative financing at lower cost, so comparing options is worthwhile.
If the equity does not fit, the realistic choices are to wait while you pay down the mortgage, pay part of the PACE balance separately before applying, or look at non-agency structures. Partial payoff alone does not clear the lien.
Mistakes That Stall a File
- Assuming a partial PACE payoff is enough.
- Relying on an old payoff figure after it expires. Payoff statements are good for a stated date, and interest accrues.
- Not disclosing the PACE obligation on the application.
- Assuming every PACE program is the same. Senior and subordinate programs get different treatment.
- Skipping the post-closing check that the assessment came off the tax bill.
- Treating the loan as a rate-and-term deal when the payoff makes it cash-out under the rules.
Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
Frequently Asked Questions
Can I pay off only part of my PACE balance and still refinance?
No, where the lien is senior. Freddie Mac says the obligation must be paid in full, and Fannie Mae requires payoff when equity is sufficient. A partial payment leaves the lien in first position.
Can a PACE lien be subordinated to my new mortgage?
Generally not as a practical step for a borrower. Some programs are subordinate from the start, and agencies will buy loans on those properties. If your lien is senior, the usual path is payoff, not renegotiation.
How do I find out who owns my current mortgage?
Your servicer can tell you, and a prospective lender can usually look it up. It matters because the no-cash-out PACE payoff route depends on agency ownership of the current loan. When it is not agency-owned, the cash-out refinance is the fallback.
Will the payoff come out of my cash proceeds?
Yes. The PACE payoff is funded from the new loan at closing as a line on the Closing Disclosure. It reduces the cash you receive, and if the equity is thin, there may be no cash back at all.
Does the assessment stay on my tax bill after I refinance?
It should not, once it is paid in full. Because PACE is collected through the tax bill, check the next bill and your escrow analysis to confirm the release and the updated escrow.
Next Steps
Start by requesting a written payoff statement from your PACE administrator and confirming whether the lien is senior. Then check your equity against the cash-out limit for your home type before you order an appraisal. For the leverage, seasoning, and credit parameters behind this lane, see Lendmire’s cash-out refinance programs. 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, subject to lender guidelines and full file review. Nothing here is a commitment to lend.
For your own numbers, request a scenario review with Lendmire.
About Lendmire
Lendmire (NMLS# 2371349) is a mortgage broker licensed for consumer lending in 16 states. Lendmire arranges FHA, VA, conventional and jumbo purchase and refinance loans through wholesale lenders; every file is underwritten by the lender under the applicable program guidelines. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
1. CFPB defines PACE financing
2. Fannie Mae Selling Guide B5-3.4-01, Property Assessed Clean Energy Loans
3. Freddie Mac, Refinancing and Energy Retrofit Programs
4. Freddie Mac Guide Section 4301.4
5. Fannie Mae Eligibility Matrix
6. CFPB, Residential Property Assessed Clean Energy Financing
This article is part of Lendmire’s Conventional Loans series — every loan program’s qualification details, guidelines, and scenarios live on the loan options page.
Related reading: Can a Home Still in Probate Get a Conventional Cash-Out? · How to Get a Conventional Cash-Out After a Quitclaim From a Parent · How to Apply for a Conventional Cash-Out Refinance Step by Step
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Required disclosures. Lendmire (NMLS# 2371349) operates as a licensed mortgage broker, not a direct lender or depository. The discussion in this article is general in nature and should not be relied upon as financial, legal, or tax advice — every investment scenario is unique and should be reviewed by a qualified professional. Any loan inquiry is subject to lender underwriting, and this article is not a commitment to lend or a guarantee of approval. Mortgage rates, loan terms, and program guidelines vary by borrower, property, and state, and may change without notice. Equal Housing Opportunity. Verify licensure at NMLS Consumer Access.