The Quick Read: Aim the money at the debts that cost you the most to carry, and leave cheap or nearly finished debts alone. A cash-out refinance first pays off your current mortgage, then the debts you name, and sends you whatever remains. Only a true cash-out loan can do this. The trade is that unsecured debt becomes debt secured by your home, so the ranking step matters.
Key Takeaways
- Rank every debt by what it costs you to carry, not by balance size alone.
- Credit cards and personal loans are the usual first targets. Low-interest or short-remaining debts are often better left out.
- A rate-and-term refinance, an FHA Streamline or a VA streamline refinance cannot pay off your other debts. Only a cash-out loan can.
- Closing costs and a longer repayment term can eat the savings, so compare total cost, not just the monthly payment.
- Direct payoff at closing keeps the money pointed where you planned.
How Does a Cash-Out Refinance Move Your Money?
The loan pays things in a fixed order. Your current first mortgage goes first. Closing costs come next. Then any debts you list are paid directly. Whatever is left comes to you as cash.
You are not adding a second loan on top. The new mortgage replaces the old one. Your old balance takes on the new loan’s terms, and that includes the interest cost and the repayment schedule. A longer term can lower the monthly pressure while raising what you pay overall. Not a free lunch.
Lendmire arranges cash-out refinance programs for homeowners through wholesale lenders. Across those programs, the size of the new loan is capped by your home’s appraised value. The cap is where “how much can I target?” gets answered.
If you want the order of steps laid out end to end, Lendmire has a separate piece Cash-Out Refinance Timeline for Consolidating Card and Loan Debt.
Which Debt Deserves the Money First?
Rank by cost of carrying, highest first. Then check how much time each debt has left. Then check whether paying it off helps your debt-to-income ratio (DTI), which is your monthly debts divided by your monthly gross income. Lenders use DTI to judge whether you can handle the new payment.
Here is how common debts usually sort:
| Debt | Cost of carrying | Time left | Usual move |
|---|---|---|---|
| Credit card balance | Often highest | Open-ended | Pay off first |
| Personal loan | Often high | Several years | Strong candidate |
| Auto loan, many years left | Moderate | Years | Compare carefully |
| Auto loan, near payoff | Moderate | Short | Often leave out |
| Student loan | Often lower | Long | Usually leave out |
That last row has a wrinkle. Student loans carry protections, such as income-based repayment options, that vanish once the debt is folded into a mortgage. The federal consumer-finance regulator’s research on paydown behavior found that borrowers most often named paying off other bills as their reason for cash-out. It also found large credit card and auto balance drops around the time of refinance, while student loans were less likely to be paid down. That pattern fits the logic above.
A Picture of the Ranking in Practice
Picture a homeowner with four debts: a maxed-out card, a personal loan, a car loan with about a year and a half left, and a low-interest student loan. The card goes on the list first. The personal loan goes second. The car loan stays off, because a short debt moved into a thirty-year mortgage would stretch out and cost more in total interest. The student loan stays off too.
Now add the cap. Say the current mortgage is about 55% of the home’s value and the program tops out at 80% on a one-unit primary residence. That leaves roughly 25 percentage points of the home’s value to cover closing costs, the two payoffs and any cash. If the payoffs don’t use all of it, you borrow less. Borrow what the plan needs, not what the cap allows.
The cap is a ceiling, not a target. Plenty of people treat it as a shopping budget. Don’t.
Which Refinance Can Pay Off Other Debts?
Only a full cash-out refinance can. The type of loan decides whether you can target debt at all, and this is where many homeowners get tripped up.
A limited cash-out refinance, often called rate-and-term, replaces your first mortgage and little else. Under Fannie Mae’s rules, only subordinate liens used to buy the property can be rolled in, and cash back is held to a small cap. Pay off a credit card with it and the loan stops being rate-and-term. It becomes cash-out, with the lower leverage that comes with that.
The government streamlines are narrower still. An FHA Streamline and a VA IRRRL both refinance an existing government-backed loan to lower the payment or interest cost. They do not carry a route for paying a card or a personal loan. Across the programs Lendmire places, the VA IRRRL has a 0.5% funding fee unless the borrower is exempt, with seasoning of the later of 210 days and six payments. None of that helps with debt payoff.
| Refinance type | Pays off cards and loans? | What it is for |
|---|---|---|
| Cash-out refinance | Yes | Debt payoff, projects, cash |
| Rate-and-term (limited cash-out) | No | Changing rate or term |
| FHA Streamline / VA IRRRL | No | Lowering cost on a government loan |
VA has its own cash-out option as well, and it can pay off non-VA debts. VA also requires you to live in the home.
How the Loan Is Underwritten, Step by Step
Underwriting is the lender’s review of whether you and the property fit the program. Here is the sequence on a conventional cash-out loan, which is what most homeowners ask about.
1. Appraisal. A new appraisal sets the home’s value. That value sets the maximum loan, and therefore the maximum cash.
2. Leverage cap. On a one-unit primary residence, conventional cash-out tops out at 80% loan-to-value (LTV), which is the loan amount divided by the home’s value. Two- to four-unit primary residences, second homes and investment properties are capped at 75%. A wholesale lane reaches 89.99% LTV with no mortgage insurance. It needs a 680 score, a 50% ratio, a thirty-year fixed loan, a primary residence and a conforming balance, plus its own six months of seasoning. Every figure here is subject to lender guidelines and full file review.
3. Seasoning. Seasoning is the waiting period between ownership events. On a conventional cash-out, the first mortgage being paid off must be at least 12 months old, measured note date to note date, and a borrower must have been on title for six months. Fannie Mae’s cash-out section also describes a delayed financing exception for recent all-cash buyers. Inheritance and legal-award exceptions exist as well.
4. Credit and ratios. Wholesale conventional programs start at a 620 decision score, though the automated finding governs most files. The total ratio ceiling is 50% on automated approvals. Manually underwritten loans run tighter, at 36% or 45%.
5. DTI after the payoffs. This step is what makes targeting pay off. Debts paid at closing generally drop out of your ratio. On most conventional files, a revolving account paid at closing can be excluded without closing the account. Collections, charge-offs, judgments and liens must be paid at or before closing. Fannie Mae’s monthly debt obligations section covers other ways debts leave the ratio, such as debts paid by someone else with 12 months of documented payments. Deferred student loans still count.
6. Mortgage insurance. Insurance is required above 80% LTV. You can request cancellation at 80% of the original value with a good payment history, no subordinate liens and no value decline. The servicer must end it automatically at 78%. Final terms depend on lender guidelines, property type, leverage, and the borrower’s complete credit picture.
Direct Payoff or Cash in Hand?
Name the debts on the application and let the closing agent pay creditors directly. That is the cleaner route. The money goes where you planned, and the lender can verify it on the settlement paperwork. You also remove the temptation to spend the check.
Taking cash and paying the debts yourself sounds flexible. In practice, it creates a gap. Money sits in your account, balances sit open, and the plan depends on you. For debts that must be paid at closing, such as collections or liens, direct payoff is not optional anyway.
Tell your loan officer up front that you are consolidating. The payoff statements drive the numbers, and the lender needs them to size the loan. If a payoff statement comes in higher than expected, the cash to you shrinks. If the proceeds fall short of your list, drop the lowest-ranked debt and keep the rest. Don’t push the loan past the plan.
Where the General Rule Breaks
A few situations bend the usual cash-out path.
- Free-and-clear homes. A refinance of a home with no mortgage is treated as cash-out on conventional loans. VA, by contrast, expects an existing first mortgage.
- Energy retrofit liens. Some energy-only liens, such as PACE loans, can be paid within certain refinances. Rules differ by program, so ask before assuming.
- A remaining second mortgage or HELOC. Any lien that stays on the home counts toward combined loan-to-value, which squeezes the cash available.
- Occupancy. Second homes and investment properties carry the lower leverage caps above. VA needs you to live in the home.
- Texas. A cash-out on a Texas homestead is capped by the state constitution. The wholesale lane with no mortgage insurance is not written there. Lendmire’s piece How Much a Texas Homestead Cash-Out Refinance Funds for a Second Home goes deeper.
What Does the Decision Look Like?
The decision turns on total cost, not the new monthly payment. Moving a short debt into a long loan can lower your payment while raising what you pay over the years. Closing costs, which you generally pay on a cash-out refinance, add to the bill. The question is whether the interest saved on the targeted debts beats those costs. Run that comparison before you apply.
The risk is not abstract. The CFPB has noted that paying non-mortgage debts with mortgage debt can increase the risk of foreclosure. Its research also found credit scores rose after cash-out and then eased, with card balances trending back toward earlier levels in the following year. Paying the cards off is the easy part. Keeping them paid off is the real work.
Here is a short checklist for the stay-paid-off part:
- Keep the accounts open if the lender allows, but set a firm budget.
- Automate the payments on whatever debts remain.
- Leave a cushion of cash or reserves in place rather than spending every dollar of proceeds.
- Skip the refinance if your spending, not your interest cost, is the real problem.
Compare the alternatives for this job too:
| Option | Leaves first mortgage in place? | Typical fit |
|---|---|---|
| Cash-out refinance | No, replaces it | Large debts, worthwhile new terms |
| Home equity loan or HELOC | Yes | Keeping a good first mortgage |
| Staying put | Yes | Debts are cheap or nearly done |
The CFPB says a cash-out refinance can be more or less expensive than a HELOC depending on the terms. If your current first mortgage is a good one, a second lien may beat replacing it. This one is a genuine toss-up, and the answer depends on your numbers.
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
Cash-out refinance: A new mortgage that replaces your current one and pays you, or your creditors, the difference.
Limited cash-out (rate-and-term) refinance: A refinance that pays off your first mortgage and closing costs, with only small cash back.
Loan-to-value (LTV): Your loan amount divided by your home’s appraised value.
Debt-to-income ratio (DTI): Your monthly debt payments divided by your gross monthly income.
Seasoning: The waiting period a lender requires before you can refinance or cash out.
Direct payoff: Payment of your creditors straight from loan proceeds at closing.
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. Every program figure above is subject to lender guidelines and full file review, and nothing here is a commitment to lend.
Frequently Asked Questions
Can I pay off my credit cards with a rate-and-term refinance?
No. A rate-and-term refinance covers your current first mortgage, closing costs and, in some cases, a purchase-money second lien, with only incidental cash back. Paying a card turns the loan into a cash-out refinance, which carries a lower leverage cap and its own seasoning rules.
Do I have to close my credit cards after they are paid off?
Not necessarily. On most conventional files, a revolving account paid at closing can be left out of your DTI without being closed. A lender can still ask for different terms, so confirm with your loan officer before you assume anything.
Which debts should I leave out of a cash-out refinance?
Leave out debts that are cheap to carry or close to finished. A car loan with a year or so left is a common example. Moving it into a thirty-year mortgage stretches the repayment and can raise your total interest cost. Student loans often carry repayment protections you would lose.
Should I tell the lender I am consolidating debt?
Yes. Name the debts on the application. The lender needs payoff statements to size the loan, and listed debts can be paid directly at closing. Direct payoff also lets the lender verify that the money went where you said it would.
What happens if the proceeds don’t cover my whole payoff list?
Rank the list and drop the lowest-ranked debts. Pushing the loan toward the cap to cover everything raises your balance and your costs. If the shortfall is large, a different tool, such as a second lien or a payoff plan on the remaining balance, may fit better.
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 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, Cash-Out Refinances and Paydown Behavior of Non-Mortgage Debt Balances
2. Fannie Mae Announcement SEL-2025-08
3. Fannie Mae Selling Guide, B2-1.3-03 Cash-Out Refinance Transactions
4. Fannie Mae Selling Guide, B3-6-05 Monthly Debt Obligations
5. CFPB, Cash-Out Mortgage Refinance Borrowers Improve Credit Scores
6. CFPB — What other types of loans are similar to a HELOC?
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: Cash-Out Refinance Use of Proceeds Rules for Debt Consolidation · How Much Credit-Card Debt Justifies a Cash-Out Refinance · Can You Get a Cash-Out Refinance on a Paid-Off Condo?
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
- Mortgage Loan Originator · NMLS# 1129696 · Verify on NMLS Consumer Access
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Important disclosures. Lendmire (NMLS# 2371349) is a licensed mortgage brokerage. Lendmire is not a direct lender, depository institution, or financial advisor. All loan inquiries are subject to lender underwriting; this article does not constitute a commitment to lend. Rates, terms, and program guidelines are subject to change without notice and vary by borrower profile, property type, and state. Information in this article is general in nature and is not financial, legal, or tax advice. Equal Housing Opportunity. NMLS Consumer Access: nmlsconsumeraccess.org.