The Quick Read: A PACE assessment has to be paid off at or before closing on a VA cash-out refinance. It cannot stay on title, because VA requires its loan to hold the first lien. The payoff comes out of the new loan, and it counts toward the 100% limit on the home’s appraised value. Any shortfall above that limit comes from the borrower’s own cash.
Key Takeaways
- VA loans must sit in first-lien position. A PACE assessment ranks ahead of the mortgage in many programs, so it is an obstacle to clear, not a cost to carry.
- The VA cash-out refinance is the VA vehicle for retiring the lien. The streamline (IRRRL) cannot do it.
- The payoff counts toward the loan amount. Equity decides whether the file works.
- Getting the payoff statement right and confirming the recorded release are the two steps that most often go wrong.
VA cash-out estimate
Seeded with an example value, a typical balance, and a round cash request at the first-use fee; change any field.
Editable benchmark: 7.40% as of October 15, 2026 · Freddie Mac 30-year average via FRED®. A conventional market reference, not a VA cash-out refinance quote.
Illustrative starting assumptions: a $350,000 home value, a $193,000 current balance, the full-value VA cap with the first-use funding fee financed, a thirty-year term at the current Freddie Mac benchmark, and property taxes and insurance estimated at typical national rates. Every field is editable.
Illustrative estimate only — not a Loan Estimate, approval, quote, or commitment to lend. The rate field carries the weekly Freddie Mac thirty-year conventional benchmark, a market reference and not a VA cash-out refinance quote; a VA loan is priced by the lender at lock. The total loan, funding fee included, is capped at the program leverage on the reasonable value; the fee follows the tier chosen. The cash available is what the cap allows less the balances paid off and the fee, before closing costs, which are not included. The HELOC line is the line program’s combined loan-to-value ceiling applied to the same value and balance. Taxes and insurance are editable estimates. The debt-to-income figure is a guideline; residual income decides a VA file. Licensed in sixteen states for consumer mortgages.
What Is a PACE Lien, and Why Does It Outrank Your Mortgage?
PACE stands for Property Assessed Clean Energy. It finances energy, resilience and similar upgrades, and it is repaid through a special assessment on the property tax bill, per the Federal Register. Solar panels, windows and HVAC are common examples.
Here is the catch. Depending on the program, a PACE obligation may be paid before or after other claims in a foreclosure, according to NASEO. Many programs carry what the Federal Register calls “super-priority” status. That means the assessment ranks ahead of an existing first mortgage and can stay with the property when it sells.
That ranking is the whole problem. A VA-guaranteed loan has to be secured by a first lien. A lien that can jump ahead of it breaks that rule.
Where VA Stands (and Why Some Pages Disagree)
Online sources contradict each other on this point, so here is the sequence.
In July 2016, VA issued Circular 26-16-18 on PACE loan processing. It cited the statutory first-lien requirement and let a PACE-encumbered property stay eligible only if the lender confirmed two things. First, state law had to collect and secure the obligation like a special assessment. Second, the property could not be subject to a superior lien for the full outstanding PACE balance at any time. Only delinquent scheduled payments could rank ahead of the VA loan.
That circular now sits on VA’s previous circulars page. It is history, not an active route.
Across the wholesale programs we place VA files with, the working assumption is simple. A PACE obligation gets paid off at or before closing. Pages that suggest it can ride along on title are usually repeating the old circular.
The Three Paths, Compared
| Path | VA cash-out fit | What has to happen | Main risk |
|---|---|---|---|
| Leave it on title | Not workable | Nothing | Breaks first-lien rule |
| Subordinate it | Generally unavailable | PACE holder must agree | Providers often decline |
| Pay it off at closing | The working route | Payoff from loan proceeds | Needs enough equity |
Subordination sounds tidy, but one PACE provider states publicly that it is not available. That is one provider’s practice, not a universal rule. Still, it shows why subordination rarely rescues a file.
Why It Takes a Cash-Out, Not a Streamline
The IRRRL, VA’s streamline refinance, exists to lower the rate on an existing VA loan or move it from adjustable to fixed. It has no VA appraisal and a 0.5% funding fee unless the borrower is exempt. It cannot pay off liens other than the VA loan being refinanced. Cash back is limited to small closing adjustments, with one exception for energy-efficiency reimbursement.
A VA cash-out refinance is built differently. It reaches up to 100% of the appraised value, including the financed funding fee. It refinances any loan type into VA, and it pays off liens of other kinds. VA’s Lenders Handbook covers the cash-out refinance in its refinancing chapter and describes it as one that pays off liens of any type. Check the current handbook text with your loan officer, since the chapter has been updated more than once.
The cash-out carries the same seasoning as the streamline: the later of 210 days from the first payment and the sixth payment. It also needs a net tangible benefit. VA’s cash-out rule, published as an interim final rule, defines net tangible benefit, recoupment and seasoning, and sets the 100%-of-value limit.
Step by Step: How to Clear the Lien
1. Confirm the lien exists and what type it is. Look at the property tax bill first. A PACE assessment usually shows as a line item. Then check the title commitment or public records. Do not confuse it with a solar lease or a UCC filing on solar equipment. Those are different instruments with different payoff paths.
2. Request an official payoff statement. Ask the PACE administrator, the county tax office, or both. Ask for the exact payoff to a specific closing date, including accrued interest and fees. Payoff figures expire, so expect to refresh the statement if closing moves.
3. Check prepayment terms. PACE contracts differ. Some charge a prepayment fee and some do not. Lender guidance generally holds that refinance proceeds cannot cover a prepayment penalty on an existing lien. Raise this early with your loan officer, because it can change who pays what at the table.
4. Run the equity check. This is the step that decides the file. The loan amount, including the financed funding fee, divided by the appraised value cannot exceed 100%. The PACE payoff counts in the loan amount. VA Circular 26-18-30 states that the borrower must pay any amount over 100% at closing.
5. Structure the loan as a cash-out and order the appraisal. The appraiser reviews special assessments as part of the data on the property. VA’s fee-panel guidance lists current taxes, including special assessments, among appraisal inputs. A full VA appraisal and full underwriting follow, with residual income as the controlling test.
6. Pay the lien from proceeds at closing. Title or escrow sends the payoff directly to the PACE administrator or tax collector. It does not stay on title and it does not come out of your pocket first, unless equity runs short.
7. Verify the recorded release. A payoff does not clear the public record by itself. Confirm the release or satisfaction is recorded. After that, the line item should drop off the next tax bill, as the Palm Beach County Tax Collector describes for its program.
What the Numbers Look Like
Picture a veteran whose home appraises at a certain value. The existing VA loan, the PACE payoff, the financed funding fee and the closing costs all stack toward that 100% ceiling. If the stack lands under 100%, cash back is whatever room remains. If it lands over, the veteran covers the overage at closing.
Two program facts matter here. The cash-out funding fee is 2.15% for a first use and 3.3% after that, and it can be financed. Veterans receiving compensation for a service-connected disability, and the other exempt groups, pay no funding fee. An exempt borrower has more room under the ceiling.
Paying off PACE also changes the monthly picture. The assessment disappears from the tax bill, and a larger mortgage balance replaces it. Compare the whole monthly obligation, not just the tax line. Escrowed borrowers will see the tax escrow reset.
Timing Against the Tax Calendar
PACE is collected with property taxes, so the payoff interacts with where you are in the tax year. Ask the administrator how the current-year installment is handled. It may be included in the payoff figure, billed separately, or already paid. Your loan officer and title company need that answer before the payoff amount is final.
After closing, the tax impound resets. If the lender collects taxes in escrow, the new monthly escrow reflects the bill without the PACE line. Expect a short adjustment period as the county updates its records.
Where the General Rule Breaks
Short equity. If the PACE payoff, the existing loan, the funding fee and costs exceed 100% of value, the borrower brings cash. Options are paying down the difference, waiting for the value to rise, or paying the assessment down before applying. The decision depends on how large the gap is relative to savings.
A PACE-only lien. Some sources say VA will not do a cash-out on a home with no existing mortgage lien, tied to a handbook update announced in late 2024. This matters most if PACE is the only lien on the home. Confirm the current handbook text with a loan officer before treating a PACE-only payoff as a qualifying cash-out.
Delinquent PACE. Missed PACE payments are handled like missed property taxes. That can lead to a tax certificate and potential loss of the home, even when the mortgage is current, per the Palm Beach County Tax Collector. Lenders will want the account current before closing.
Commercial PACE. C-PACE is a different product. Virginia’s C-PACE statute, for example, excludes residential property under five units. Do not mix the two up when searching your records.
A tempting exception. 38 CFR 36.4356 lets VA disregard some superior assessment liens with prior approval, for municipal-type services. It is not a route for PACE. Do not build a plan around it.
Other loan types. Fannie Mae will not buy loans on properties with an outstanding priority PACE lien, and it expects borrowers with enough equity to pay it off, per its Selling Guide. Freddie Mac also excludes properties with PACE obligations that may take first-lien priority. This is context only. VA has its own rules.
Common Misconceptions
- “PACE is just a tax, so it can stay.” VA requires a first lien. This is not a choice the borrower or lender gets to make.
- “I can wrap it into a streamline.” The IRRRL cannot pay off liens other than the VA loan being refinanced.
- “Paying it off ends the paperwork.” The release still has to be recorded.
- “The CFPB rule fixed this.” The CFPB’s Regulation Z rule governs how PACE is originated and how ability to repay is assessed. It does not change how a VA lender treats an existing PACE lien.
Pre-Application Checklist
| Item | Who provides it | Why it matters |
|---|---|---|
| Latest property tax bill | County tax office | Shows the PACE line |
| Title commitment | Title company | Confirms recorded liens |
| PACE payoff statement | PACE administrator | Exact payoff to closing date |
| Prepayment terms | PACE contract | Affects what proceeds can pay |
| Certificate of eligibility | VA | Confirms entitlement |
Where the Decision Lands
The decision comes down to equity and net tangible benefit. If the home’s value covers the payoff, the loan clears the 100% test, and the new loan gives a documented benefit, the cash-out can retire the lien. If not, the veteran looks at bringing cash, waiting, or paying down the assessment first.
For the full picture of how the program works, see the VA cash-out refinance program page. If you are also comparing a second mortgage, Lendmire’s piece VA Cash-Out Refinance Criteria for Choosing Over a Second Lien walks through that choice. Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
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. Every figure above is subject to lender guidelines and full file review, and nothing here is a commitment to lend.
Key Terms Defined
PACE: A financing program for home upgrades that is repaid through a special assessment on the property tax bill.
First lien: The claim that gets paid first if a property is sold in foreclosure; VA requires its loan to hold this position.
Net tangible benefit: A documented gain from the refinance, such as a shorter term, lower interest rate, or removal of mortgage insurance.
Seasoning: The waiting period after the first payment on the existing loan before a VA refinance is allowed.
Funding fee: A one-time VA fee that can be financed into the loan and is waived for exempt borrowers.
Payoff statement: An official letter showing the exact amount needed to clear a lien on a stated date.
Frequently Asked Questions
Can I keep a PACE lien on a VA loan?
Not in practice. VA requires a first-lien position, and VA’s old PACE circular is historical. Plan on paying the assessment off at or before closing.
Do I pay it off before I apply or at closing?
At closing, from the loan proceeds, in most cases. Title or escrow pays the administrator directly. Order the payoff statement before you apply so the lender can size the loan correctly.
What if I do not have enough equity?
The loan, including the financed funding fee, cannot exceed 100% of the appraised value. You would bring cash to cover the gap, wait for more equity, or reduce the assessment balance before applying.
Can a VA streamline pay it off instead?
No. The IRRRL cannot pay off liens other than the VA loan being refinanced, so the cash-out refinance is the route.
Is a PACE lien the same as a solar lien?
No. PACE is a tax-bill assessment. A solar lease or UCC filing on equipment is a separate instrument. Check the tax bill and title commitment to see which you have.
For your own numbers, request a scenario review with Lendmire.
About Lendmire
Lendmire is a mortgage brokerage (NMLS# 2371349) licensed for consumer mortgage lending in 16 states, arranging FHA, VA, conventional and jumbo purchase and refinance loans through a wholesale lending network. Eligibility is determined by the lender on each file. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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References
1. Federal Register: Residential PACE Financing
2. NASEO
6. VA cash-out interim final rule (83 FR 64459)
8. Palm Beach County Tax Collector
This article is part of Lendmire’s VA Loans series — every loan program’s qualification details, guidelines, and scenarios live on the loan options page.
Related reading: VA Cash-Out Refinance Rules in Community-Property States · How to Clear a Solar Lien Before Your First VA Cash-Out · How to Apply for a VA Cash-Out Refinance With an Existing VA Loan
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.