The Quick Read: It depends on the net payment change. A cash-out refinance lowers your ratio only when the monthly payments you eliminate are larger than the payment the bigger mortgage adds. Debts paid off at closing can leave the ratio, and the new mortgage payment goes in. The ratio can fall, hold flat, or rise, and a lower ratio does not always mean a cheaper path.
What Does Debt-to-Income Actually Measure?
Debt-to-income (DTI) is your total monthly debt payments divided by your gross monthly income. Gross means before taxes. Lenders count your housing payment, car loans, student loans, minimum card payments and similar obligations.
Every program sets its own ceiling. Across the wholesale programs we place files with, the automated underwriting finding governs most files, with a total ratio ceiling of 50%. Manually underwritten loans run tighter, at 36% or 45% depending on credit score and reserves. A 50% ceiling is not a promise of approval, because the automated system also weighs credit, equity and reserves. Everything here is subject to lender guidelines and full file review, and none of it is a commitment to lend.
How Does a Cash-Out Refinance Change the Ratio?
A cash-out refinance replaces your current mortgage with a larger one and hands you the difference. When that difference pays off other debts at closing, two things happen at once:
1. The paid-off debts’ monthly payments drop out of the calculation.
2. Your new, larger mortgage payment replaces your old housing payment.
The ratio improves only if the first change (the paid-off debts’ payments dropping out) outweighs the second (your new, larger mortgage payment replacing your old housing payment). That is the whole test. Everything else is detail.
Revolving debt like credit cards is the cleanest case. Under the Fannie Mae Selling Guide, a revolving balance paid off at or before closing does not need its payment counted. Fannie Mae dropped the old requirement that you close the account, per its 2015 announcement. A lender can still add its own closure rule, so ask up front.
Partial paydowns are different. Paying a card down to a smaller balance generally leaves a payment in the ratio. Paying it to zero at closing is what removes it.
Which Debts Leave Your DTI, and Which Don’t?
| Debt type | Paid at closing | Effect on DTI |
|---|---|---|
| Credit cards | Yes | Payment removed |
| Personal loans | Yes | Payment removed |
| Auto or student loans | Yes | Payment removed |
| Collections, judgments, liens | Often required | Must be paid at or before closing |
| Debt not paid off | No | Payment stays in |
Some debts are not optional. Delinquent credit, including judgments, tax liens and non-mortgage charge-offs, generally must be paid at or before closing, with exceptions in the guide. The settlement agent pays creditors from your proceeds, and the payoffs show on your closing paperwork.
One shortcut needs no refinance at all. Fannie Mae lets lenders exclude an installment loan with 10 or fewer payments remaining. If a car loan is nearly done, it may already be out of the ratio.
The Break-Even Test
Here is the method, with no dollar figures needed.
1. Add up the monthly payments on every debt you would pay off.
2. Take your new mortgage payment and subtract your current one. That is the increase.
3. If step 1 is larger than step 2, your DTI falls. If it is smaller, your DTI rises.
Three pictures show how this plays out:
- DTI falls. You carry several cards and a personal loan, and together their minimum payments are far larger than the added mortgage payment. The ratio drops noticeably.
- DTI holds flat. The debts you clear are modest. The bigger mortgage payment nearly cancels the savings.
- DTI rises. You roll in a small balance with a tiny payment. You added a large loan and removed almost nothing.
Lenders also treat cards with no stated payment cautiously. The automated system uses the greater of a flat minimum or a percentage of the balance, which is another reason to clear them fully rather than partly.
Can a Lower Ratio Still Cost You More?
Yes. A lower ratio is not the same as a lower cost.
Spreading short-term debt over a mortgage term cuts the monthly payment but usually raises total interest over the life of the loan. The Consumer Financial Protection Bureau makes a sharper point: turning unsecured debt into mortgage debt puts your home behind it. Missing a card payment hurts your credit. Missing a mortgage payment can cost you the house.
That research also found credit scores jumped after cash-out refinances. Card balances then drifted back toward earlier levels, and scores slipped, though they stayed above where they started. Paying the cards off fixes the ratio on paper. It does not fix the spending habit behind them.
Closing costs matter too. If they are financed, they shrink your net proceeds. Cash-out loans also carry pricing adjustments in the agency guides, and the loan estimate you receive shows the actual terms.
What Does the Lender Need to See?
Most of the work is equity, seasoning and reserves. The envelope we work in on conventional cash-out:
- Leverage: 80% loan-to-value (LTV) on a one-unit principal residence. LTV is the loan balance divided by the home’s value. Two- to four-unit homes, second homes and investment property top out at 75%.
- Seasoning: The first mortgage being paid off must be at least 12 months old, measured note date to note date. A borrower must have been on title for 6 months, per the Fannie Mae cash-out guide. Delayed financing, inheritance and legal-award exceptions exist.
- Reserves: On automated files, a ratio above 45% triggers a requirement for six months of reserves. Reserves are savings left after closing.
- A no-mortgage-insurance lane: A wholesale option reaches 89.99% LTV with no mortgage insurance. It needs a 680 score and a 50% ratio on a thirty-year fixed primary residence with a conforming balance, plus its own six months of seasoning. It is not written in Texas, where the state constitution caps homestead cash-out at the agency figure.
- Occupancy: Freddie Mac requires all borrowers to occupy the home on a primary-residence cash-out. It also treats a free-and-clear home as a cash-out refinance. Terms vary by lender guidelines, property type, leverage, credit profile, and full file review.
An appraisal sets the current value that caps your loan. Expect one on a cash-out.
Which Refinance Programs Can Pay Off Debt?
Only the cash-out program does.
| Program | Pays off consumer debt? |
|---|---|
| Conventional cash-out | Yes |
| Rate-and-term (limited cash-out) | No |
| FHA Streamline | No |
| VA IRRRL | No |
A rate-and-term refinance pays off your existing first mortgage, closing costs and any purchase-money second lien. Cash back is incidental. Fannie Mae’s limit is the lesser of 2% of the new balance or $2,000. The FHA Streamline and the VA IRRRL are for existing government loans, and neither is a debt-consolidation tool. They exist to improve the loan you already have.
If you hold an FHA or VA loan and want to consolidate debt, you need a cash-out product instead. Lendmire’s piece Should FHA Homeowners Use a Conventional Cash-Out Refinance for Debt? covers that switch.
When It Makes Sense, and When It Doesn’t
It tends to make sense when:
- The debts you clear carry payments well above the mortgage increase.
- You have enough equity to stay within the leverage cap.
- Your income is steady and you have a plan to stop re-using the cards.
- You will keep the home long enough to absorb the closing costs.
It tends not to make sense when:
- The ratio barely moves.
- The balances are small, so the new loan adds more than it removes.
- Spending is the real problem.
- You may sell soon, which leaves little time to recover the costs.
Also compare the alternatives on the ratio itself. A home equity line of credit tends to carry lower rates, payments and foreclosure risk than a cash-out, according to the CFPB’s annual mortgage report. A debt management plan through a nonprofit counselor avoids putting the home at risk. These options do not remove debt payments the same way, but they do not reset your first mortgage either.
Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
Key Terms Defined
Debt-to-income ratio (DTI): Your total monthly debt payments divided by your gross monthly income.
Cash-out refinance: A new, larger mortgage that pays off the old one and gives you the difference in cash.
Loan-to-value (LTV): The loan balance as a percentage of the home’s value.
Seasoning: The waiting period tied to how long you have owned the home or held the loan being paid off.
Reserves: Savings you still hold after closing, measured in months of housing payments.
Limited cash-out refinance: A rate-and-term refinance with only incidental cash back.
Frequently Asked Questions
Do I have to close my credit cards after paying them off at closing?
Not under the agency rule. A revolving account paid to zero at closing can stay open for DTI purposes. Some lenders add their own closure requirement, so ask before you apply.
Does paying down a card, rather than off, help my ratio?
Generally not by much. The rule removes the payment when the balance is paid off at or before closing. A smaller balance usually still leaves a payment counted.
Can a rate-and-term refinance consolidate my debt?
No. It pays off your first mortgage, closing costs and a purchase-money second lien, with only incidental cash back. Consolidating cards or loans takes a cash-out refinance.
What if I took the cash and the ratio still came out too high?
Then the payments removed were too small against the payment added. Options include paying off more debt, borrowing less, adding reserves, or choosing a different program. Limits differ by loan type and lender.
What happens if I run the cards back up afterward?
Your ratio climbs again, now with a larger mortgage behind it. The CFPB research found card balances tended to drift back toward earlier levels, which is the main risk of this strategy.
Next Step
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. You can start with Lendmire’s cash-out refinance programs and run the break-even test above before you decide. Lendmire’s broader piece Should I Cash Out Refinance To Pay Off Debt? walks through the wider decision.
For your own numbers, request a scenario review with Lendmire.
For current guidelines and terms, see Lendmire’s refinance programs page.
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. Fannie Mae Announcement SEL-2015-06
2. Consumer Financial Protection Bureau
3. Fannie Mae Selling Guide B2-1.3-03, Cash-Out Refinance Transactions
4. Freddie Mac Guide 4301.5, Cash-out Refinance Mortgages
5. Fannie Mae Announcement SEL-2025-08
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: Should You Put Card and Personal Loan Debt in a Cash-Out Refinance? · Does Unit Income Help a Cash-Out Refinance for an ADU or Renovation? · How to Buy Out a Spouse With a Cash-Out Refinance on One Income
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
- Mortgage Loan Originator · NMLS# 1129696 · Verify on NMLS Consumer Access
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- Lendmire LLC · Firm NMLS# 2371349 · Verify firm licensure
Compliance and disclosures. Lendmire (NMLS# 2371349) is a licensed mortgage broker and is not a direct lender, depository institution, financial advisor, or tax professional. Content in this article is general market analysis and educational information — not financial, legal, or tax advice for any specific situation. Lendmire does not guarantee loan approval; every transaction is subject to underwriting by the funding lender. Mortgage pricing and loan program guidelines are subject to change at any time without notice and vary by borrower characteristics, property type, and state regulations. Lendmire complies with Equal Housing Opportunity. Licensure verification: NMLS Consumer Access.