The Quick Read: The best program for your situation usually depends on three things: what the home equity loan paid for, what kind of first mortgage you hold, and whether you have VA eligibility. A new first mortgage can pay off both your old first loan and the home equity loan or HELOC, leaving you with one payment. If the second loan did not fund your home purchase, conventional lenders generally treat the new loan as a full cash-out refinance, even when you take no cash home.
That classification drives everything else: how much you can borrow against the home, how the loan is priced, and how long you must have owned it. Here is how it works, step by step.
Cash-out refinance estimate
The starting figures are an example value with a balance and a cash request in proportion. Replace them with yours.
Editable benchmark: 7.24% as of October 29, 2026 · Freddie Mac 30-year average via FRED®. A conventional market reference, not a cash-out refinance quote.
Illustrative starting assumptions: a $350,000 home value, a $193,000 current balance, the agency cap on a one-unit principal residence, 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 cash-out refinance quote; a cash-out loan is priced by the lender at lock. The cash available is the loan the program cap allows less the balances paid off, before closing costs, which are not included. The HELOC line is the program’s combined loan-to-value ceiling applied to the same value and balance. Taxes and insurance are editable estimates. Licensed in sixteen states for consumer mortgages.
Key Terms Defined
Home equity loan: a second mortgage paid out as a lump sum and repaid in fixed installments.
HELOC: a home equity line of credit, a second mortgage you draw from as needed, usually at a variable rate.
Second lien: any loan secured by your home that sits behind the first mortgage in line for repayment.
Cash-out refinance: a new first mortgage larger than the one it replaces, with the difference paid to you or used to clear other debt.
Limited cash-out (rate-and-term) refinance: a refinance that pays off your existing loans and closing costs, with only small incidental cash back.
LTV: loan-to-value, the new loan balance divided by the appraised value of the home.
Seasoning: the minimum time you must have held a loan or the title before a lender will refinance it.
Can a Cash-Out Refinance Pay Off a Home Equity Loan?
Yes. A new first mortgage can pay off the old first mortgage, the home equity loan or HELOC, and the closing costs in one transaction. You end up with one loan and one payment instead of two.
There is a catch, and it is the first thing to weigh. Your whole balance gets repriced to today’s terms, not just the part you are borrowing. If your current first mortgage has a structure you like, replacing it to absorb a second lien may cost more than it saves. That is a real decision, not a formality, and it comes back below.
Why do borrowers do it? Many want to leave a variable-rate HELOC behind. Others have a home equity loan with a balloon payment coming due. Some simply want one bill. The reasons are fine. The classification question is where files get surprised.
Why Is Paying Off a Second Lien Usually “Cash-Out”?
Fannie Mae and Freddie Mac draw a sharp line. A limited cash-out loan may pay off a second lien only if that second loan funded part of the purchase of the home. This is the classic “piggyback” loan taken at the time of purchase. Paying off a second lien used for anything else, such as a kitchen remodel, a car, or credit cards, turns the new loan into a full cash-out refinance. There are narrow exceptions, such as certain energy-improvement debt. The Fannie Mae Selling Guide sets out the limited cash-out definition. Lenders document the use by looking at the original purchase settlement statement.
Across the wholesale programs we place files with, this is the most common surprise. A homeowner expects the higher-leverage rate-and-term lane and learns the second loan was a renovation loan. The file then moves into the cash-out lane, with its own leverage cap and seasoning.
You can see the difference in the leverage limits:
| Loan type | Typical max LTV, one-unit primary home |
|---|---|
| Rate-and-term (limited cash-out) | 95% (97% in certain first-time-buyer programs) |
| Conventional cash-out | 80% |
Those are program guidelines, subject to lender review, and they vary with occupancy and property type. The Fannie Mae Eligibility Matrix shows how leverage changes with occupancy and transaction type, and it shows a lower cash-out limit for manufactured housing. Lendmire’s cash-out refinance programs page lays out the lanes it places.
How the Payoff Works, Step by Step
Here is the sequence a broker walks a homeowner through.
1. Classify the second lien. Pull the original closing papers. Did the home equity loan fund the purchase, or something else? If it was not a purchase, plan on cash-out.
2. Check the clocks. On a conventional cash-out, the first mortgage you are replacing must generally be at least 12 months old, counted note date to note date. At least one borrower must have been on title for six months. Freddie Mac’s Guide §4301.5 covers both clocks, and it exempts a first-lien HELOC from the 12-month test. A second-lien home equity loan or HELOC is a different case: the 12-month test is aimed at the first mortgage, not at the second lien being paid off.
3. Gather documents. Expect the usual credit, income, asset and employment documents. You also need payoff statements for both loans.
4. Appraisal. The lender compares the new loan amount to the appraised value. That ratio decides whether you fit under the cash-out cap.
5. Review your disclosures. The Loan Estimate and the Closing Disclosure itemize the costs. Compare them line by line.
6. Closing and payoff. The new loan pays both old liens directly. The lender sends payoff funds to each holder, and any remaining proceeds come to you.
7. Close the HELOC. This step gets missed. A paid-off HELOC can stay open and available to draw. Ask for a written closure and a lien release so it cannot be redrawn.
On a refinance of the home you live in, you generally get a three-day window after signing to change your mind. The CFPB explains the right of rescission: if you cancel, you still owe the original loan. Funds are typically released after that window closes.
Which Program Fits Which Borrower?
There is no single winner. Here is how the main lanes treat this job.
| Program | Can it pay off a home equity loan? | Best for |
|---|---|---|
| Conventional cash-out | Yes, as a cash-out loan | Most borrowers with a conventional or paid-off first lien |
| Conventional rate-and-term | Only if the second lien funded the purchase | Piggyback loans from the original purchase |
| VA cash-out | Yes, for eligible borrowers | Veterans, including some with non-VA first loans |
| FHA cash-out | Possible on a principal residence | Borrowers who fit FHA guidelines |
| FHA Streamline / VA IRRRL | Not for this job | Lowering the payment on an existing FHA or VA loan |
| Jumbo | Yes, lane-specific | Balances above the conforming limit |
Conventional cash-out
This is the workhorse. On a one-unit principal residence, conventional cash-out tops out at 80% LTV. Two- to four-unit homes, second homes and rentals top out at 75%. Mortgage insurance is required above 80% LTV on the agency path, so a conventional cash-out at the cap carries none. Final terms depend on lender guidelines, property type, leverage, and the borrower’s complete credit picture.
There is a wholesale lane that reaches 89.99% LTV with no mortgage insurance. It asks for a 680 score, a 50% total ratio and a thirty-year fixed rate on a primary residence with a conforming balance. It carries its own six months of seasoning. Not every file fits it, and it is not written in Texas, where the state constitution caps cash-out on a homestead at 80% of the home’s value. These specifics are subject to lender guidelines and a full review of property, leverage, and credit.
For credit, the wholesale conventional programs start at a 620 decision score, and the automated finding governs most files with a total ratio ceiling of 50%. Those are program guidelines, subject to full file review and not a commitment to lend.
VA cash-out
If you have VA eligibility, a VA cash-out can refinance a VA loan or a non-VA loan. A VA news story on refinancing notes that Veterans with a non-VA loan can refinance into a VA-backed loan. Cash-out loans must pass a net tangible benefit test, meaning the refinance has to clearly help the borrower. VA sets its own leverage ceiling and funding fee for cash-out, and lenders can set tighter limits of their own, so confirm both on your file.
The streamlines (they do not do this job)
The VA IRRRL is the VA’s streamline. It is for VA-to-VA refinances, and no loan other than the existing VA loan can be paid from its proceeds. VA’s IRRRL page says that if you have a second mortgage, the holder must agree to subordinate. In plain words, the second lien stays, and the IRRRL cannot pay off your home equity loan.
The FHA Streamline works similarly in spirit. It is built for lowering the cost of an existing FHA loan with limited paperwork and no appraisal. It is not designed to sweep in a home equity loan. If you hold an FHA or VA loan and a home equity loan, the streamline may still help with the first mortgage while the second lien stays put. A true consolidation needs a cash-out lane.
Jumbo
When the combined payoff exceeds the conforming limit, the jumbo lanes take over. Across the wholesale jumbo programs we place files with, the starting decision score is 660, leverage reaches 90% on certain lanes, and loan amounts run up to $5,000,000, with a 50% ratio ceiling on the fixed-rate lanes. Whether a specific scenario fits depends on the lender and the file.
Where the General Rule Breaks
A few situations bend the “second lien means cash-out” rule.
- Piggyback loans. A second mortgage that funded part of the original purchase price can be rolled into a limited cash-out loan, if the lender documents it with the purchase settlement statement. This is the main exception.
- Purchase funded by another loan. If you bought the home using an unsecured loan, or a loan secured by another property, the settlement statement must show the proceeds paying that loan off for the transaction to be treated this way.
- First-lien HELOC. Freddie Mac exempts a first-lien HELOC from its 12-month seasoning test. A HELOC in second position does not get that treatment.
- No mortgage at all. A new first mortgage on a home with no loan is a cash-out loan.
- Energy-improvement debt. Fannie Mae treats certain PACE and energy-related payoffs as exempt from cash-out classification.
- Recent loans. If your first mortgage is under 12 months old, conventional cash-out may be off the table for now. Waiting can change the answer.
“No cash out” also does not mean zero cash. A limited cash-out loan allows small incidental cash back. Fannie Mae caps it at the lesser of 2% of the new loan amount or $2,000; Freddie Mac uses the greater of 1% of the new loan amount or $2,000.
Should You Replace the First Mortgage at All?
This is the question that decides most files. Run the comparison honestly.
Consolidation makes sense when:
- your first mortgage’s terms are close to or worse than today’s market;
- your HELOC is variable and has become hard to budget around;
- a home equity loan balloon is approaching;
- you want one payment and a defined payoff date.
Keeping your first mortgage makes sense when:
- your existing first loan has terms you would struggle to replace;
- the second lien is small compared with the first mortgage;
- you only need to fix or restructure the second lien.
In that second case, your options include refinancing just the home equity loan, converting a HELOC into a fixed-term loan, or keeping everything as is. The CFPB notes that a cash-out refinance versus a home equity product “may be more or less expensive” depending on terms. See the CFPB’s overview of HELOC alternatives. Cash-out refinances often carry closing costs, so weigh them against the savings.
Think of it as a break-even test. Add up the closing costs of the new loan. Compare what you pay each month now against what you would pay after. Then ask how long you will hold the home. If you will sell or refinance again soon, the costs may not pay back.
Two cautions also belong here. A new loan can reset the clock on your payoff date, which is why the CFPB warns that a cash-out refinance may extend the time it takes to pay off the mortgage; its using home equity guide compares the products. And a cash-out refinance means you own a smaller share of the home afterward. Check for a prepayment penalty on your current loans before you commit.
Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
How a Broker Finds the Right Fit
Lendmire is a mortgage broker, not a lender. It works with a network of wholesale lenders and matches each scenario to the program that fits. The lenders that write a given file depend on the property type, your credit profile, how much leverage you need, and how the loans being paid off are classified.
That matching is the real value of shopping through a broker on this kind of loan. One lender’s cash-out lane may stop at the 80% cap. Another may have a no-mortgage-insurance lane that reaches higher leverage for a borrower with the right score and ratios. A VA-eligible borrower may be better served by a VA cash-out than by any conventional option. Which program is best depends on your situation, and the answer can change from file to file.
If mortgage insurance enters the picture, here is how it works. It is required above 80% LTV on the agency path, with the wholesale no-mortgage-insurance cash-out lane above as the exception. You can ask to cancel it at 80% of the original value with good payment history, no subordinate liens and no drop in value. The servicer must end it automatically at 78%. Lendmire’s conventional program sheet lists typical annual premiums of 0.58% to 1.86% of the balance, a range and never a quote. Terms depend on the lender’s guidelines, the property type, the leverage, and a full review of the credit profile.
Pre-Application Checklist
Gather these before you talk to anyone:
- the closing papers from your purchase, to prove how the second lien was used;
- the most recent statements for your first mortgage and your home equity loan or HELOC;
- the dates both loans were opened and the date you took title;
- recent pay stubs, tax returns or other income proof, and asset statements;
- a rough sense of your home’s value;
- your answers to a few honest questions. Why are you doing this? How long will you stay? What does the new payment need to look like?
If you have a Texas homestead, expect the state’s 80% cap on cash-out. If your property is a second home or a rental, occupancy sets the leverage, and the limit drops to 75% on conventional cash-out.
Frequently Asked Questions
Can I use a cash-out refinance to pay off a HELOC that is still open?
Yes. The new loan pays the HELOC balance at closing. Ask for a written closure and lien release so the line cannot be drawn again. If the HELOC stays open with a zero balance, it can be used again, which defeats the purpose of consolidating.
Will paying off my second mortgage count as a rate-and-term refinance?
Only if the second loan funded part of your home purchase and the lender can document it. If you used the money for renovations, debt or anything else, conventional lenders treat the new loan as cash-out. That means a lower leverage cap and a separate seasoning check.
Does my home equity loan have to be 12 months old?
No. The 12-month test applies to the first mortgage being replaced on a conventional cash-out, counted note date to note date. A second lien being paid off is not held to that test. Separately, at least one borrower must have been on title for six months, subject to a few exceptions.
Can a VA IRRRL or FHA Streamline pay off my home equity loan?
No. The VA IRRRL cannot pay off any loan other than the existing VA loan. The FHA Streamline is built for lowering the cost of an existing FHA loan, not for consolidating a second lien. A cash-out lane is the right tool for consolidation.
Can I change my mind after closing?
Usually, for a refinance of the home you live in. You generally have three business days after signing to cancel. If you cancel, you still owe your original loan. Rescission rights may not apply to every loan type, such as a second home, so confirm how it works on your file.
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. Program figures are subject to lender guidelines and full file review, and nothing here is a commitment to lend. Start with the paperwork behind your second loan, because how it was used usually decides which lane you are in.
For your own numbers, request a scenario review with Lendmire.
For current guidelines and terms, see Lendmire’s refinance programs page.
About Lendmire
As a mortgage broker (NMLS# 2371349), Lendmire helps homeowners and home buyers in 16 states with FHA, VA, conventional and jumbo purchase and refinance loans arranged through wholesale lenders. Lendmire is never the lender; program terms are set by the lender and the agency guidelines. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
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Informational only. Not a Loan Estimate, approval, or commitment to lend. Program availability and eligibility are subject to lender guidelines, credit approval, property review, and underwriting.
References
1. Fannie Mae Selling Guide B2-1.3-02: Limited Cash-Out Refinance Transactions
2. Fannie Mae Eligibility Matrix
5. VA News: Refinancing a non-VA loan into a VA-backed loan
6. VA: IRRRL
7. CFPB: Loans similar to a HELOC
This article is part of Lendmire’s cash-out refinance program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: Cash-Out Refinance Requirements to Pay Off Debt or Fund Renovations · Cash-Out Refinance Requirements and How the Loan Term Resets · Cash-Out Refinance Requirements to Pay Off a Timeshare Loan
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
- Mortgage Loan Originator · NMLS# 1129696 · Verify on NMLS Consumer Access
- North Carolina Real Estate Broker · License# 343312 · Verify on NCREC
- North Carolina Insurance Producer · License# 19053198 · Property, Casualty, Life, Health · Verify on NAIC SBS
- 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.