The Quick Read: A conventional cash-out refinance can pay off a PACE assessment, and when the PACE lien sits ahead of your mortgage, paying it off is usually the price of getting a conventional loan at all. Fannie Mae and Freddie Mac will not buy a mortgage on a home with a first-priority PACE lien still attached. The new loan has to retire the assessment at or before closing. If you have the equity and decline to pay it off, cash-out is generally off the table.
Key Takeaways
- PACE is repaid through your property tax bill, and in many programs it ranks ahead of your mortgage.
- Conventional loans sold to Fannie Mae or Freddie Mac generally require a priority PACE assessment to be paid off in full.
- Fannie Mae carves out a PACE payoff from its usual restrictions on paying off debts in a refinance.
- If your equity is too thin to pay it off, a limited cash-out with the PACE kept in place may be an option.
- On a one-unit primary home, a conventional cash-out refinance is capped at 80% LTV, subject to lender guidelines and full file review.
What Is a PACE Assessment, and Why Does It Complicate a Refinance?
PACE stands for Property Assessed Clean Energy. It is a way to finance solar panels, windows, HVAC or similar upgrades. You repay it through your property tax bill, not through a normal loan payment, and it is typically spread over 10 to 20 years, according to a law-firm summary of the new federal PACE rule.
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: 7.40% as of October 15, 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.
Here is the catch. Because the assessment is secured by a property tax lien, many programs give it priority over a mortgage recorded earlier. Fannie Mae’s Selling Guide says PACE loans typically get automatic first-lien priority over previously recorded mortgages. A lender that buys your mortgage would be second in line behind a tax lien. That is the whole problem.
It also follows the house. The obligation stays with the property even if you sell. A buyer inherits it, which is why it can hurt marketability.
What Is the Core Rule on Paying It Off?
The core rule is simple: Fannie Mae will not purchase a mortgage on a property with an outstanding PACE loan unless the program’s terms do not give it priority over first mortgages. Its guide says the same from the property side. Energy items financed with a PACE loan make a property ineligible for delivery if the PACE loan is not paid in full before or at closing.
The regulator agrees. The Federal Housing Finance Agency says Fannie and Freddie policies prohibit buying a mortgage on a property with a first-lien PACE loan. Its two named consequences: you cannot refinance into a Fannie or Freddie loan, and a buyer cannot use one to purchase the home.
Two notes from the way we place files. First, this is a lien-position rule, not a judgment about you. A strong credit profile does not cure a senior lien. Second, “paid off” means paid off. Partial payoffs do not clear the problem.
How Is a PACE Payoff Treated Inside a Cash-Out Refinance?
Fannie Mae’s guide allows an exception when you use the new loan to pay off a PACE loan or debt used solely for energy improvements. That exception appears in both the limited cash-out and cash-out sections. It covers energy-related debt only. Other liens you want to pay off do not get the same treatment.
Freddie Mac handles it in its own way. Its Guide has a dedicated section, 4301.8, for refinancing properties subject to an energy retrofit loan. It lists a PACE payoff as an allowed use of proceeds in a no-cash-out refinance, subject to extra requirements. It also says the new loan follows the cash-out refinance requirements in Section 4301.5. Specifics differ by investor, and your lender applies the current version of each guide.
| Loan type | What it does with PACE | Key point |
|---|---|---|
| Limited cash-out (rate-and-term) | Pays off PACE as a guide exception | Only incidental cash back |
| Cash-out | Pays off PACE, plus gives you cash | Subject to cash-out LTV and seasoning |
| PACE kept in place | First mortgage refinanced, PACE stays | Only when equity cannot cover a payoff |
What Happens When the Payoff Pushes Cash Back Too High?
This is a quirk most articles skip. A limited cash-out loan allows only small, incidental cash back. A PACE payoff can look like extra cash to the underwriting system. Fannie’s automated system may then return an Ineligible message on a limited cash-out file when it appears the borrower is receiving more than the allowed cash-back limit because of the PACE payoff.
Lenders handle that message under the Selling Guide, and the file is reviewed on its facts. You do not need to resolve it yourself, but you do need a loan officer who knows it exists.
How Is the Loan Underwritten, Step by Step?
Across the wholesale programs we place conventional files with, a PACE file moves in a predictable order.
1. Identify the PACE obligation. The loan application asks whether the property is subject to a PACE lien that takes priority over the first mortgage. You answer, and the lender checks.
2. Decide the lien position. The lender checks whether your local program gives PACE priority over the mortgage. Priority means it must be paid at or before closing. Subordinate or unsecured means standard underwriting applies.
3. Collect documents. Expect to provide the PACE contract, the tax bill showing the assessment, and a payoff statement from the PACE administrator. Ask the administrator for a current payoff early, because it carries a good-through date and a daily interest amount.
4. Choose the loan purpose. Limited cash-out if you want only the payoff. Cash-out if you also want cash.
5. Run automated underwriting. The system reviews credit, ratios and the PACE message discussed above.
6. Appraise. The appraisal sets the value, and the value decides whether you have enough equity to retire the PACE balance.
7. Close and record. The payoff is an added line the new loan must cover. After closing, the PACE lien should be released and recorded.
Programs and guidelines change. Treat the order above as the typical path, not a promise of outcome.
What Are the Cash-Out Numbers That Apply?
On a one-unit principal residence, a conventional cash-out refinance reaches 80% LTV. On two- to four-unit principal residences and second homes, it is 75%. Lenders also look at seasoning, meaning how long you have held the home and the loan. The mortgage being paid off generally must be at least 12 months old, and at least one borrower must have been on title for six months. There are exceptions for delayed financing, inheritance and legal awards.
Fannie Mae’s cash-out page also says that if your DU debt-to-income ratio exceeds 45%, six months of reserves are required. Reserves are money left in the bank after closing. And if the home is listed for sale, it has to come off the market on or before disbursement.
Credit matters too. Most wholesale conventional programs start at a 620 decision score, and the automated finding governs most files, with a 50% total ratio ceiling. Every figure here is subject to lender guidelines and full file review.
One more option, for the right file. A wholesale lane reaches 89.99% LTV with no mortgage insurance at a 680 score and a 50% ratio on a thirty-year fixed, primary residence, conforming balance. It has its own six months of seasoning, and it is not written on a Texas homestead. Whether a PACE payoff fits that lane depends on the lender.
What If You Have Equity but Won’t Pay It Off?
Then you lose cash-out eligibility. Fannie’s cash-out page says that for certain PACE transactions, borrowers who have enough equity to pay off the PACE loan but choose not to are ineligible for a cash-out refinance. It reads like a trap, and it is. Cash-out is the route that pays PACE off, not the route that works around it.
If you do not have enough equity, a different path opens. The lender may underwrite a limited cash-out refinance with the PACE loan remaining in place. Equity, in plain terms, is your home value minus what you owe. The test is whether it can cover the payoff, not whether it feels like enough.
Where Does the General Rule Break?
Edge cases are where files go sideways. These are the ones that come up.
- PACE that is subordinate or unsecured. Standard underwriting applies. This is rare, because the residential programs most borrowers meet are priority-lien programs.
- PACE taken before July 6, 2010. Fannie waives the security instrument prohibition for older PACE loans when the mortgage was bought before then or sits in a mortgage-backed pool with an issue date on or before July 1, 2010. The lender must first try to qualify you for a cash-out or limited cash-out refinance that pays off the PACE loan. FHFA’s original statement set that cutoff.
- Existing loan ownership. For limited cash-out, Fannie’s matrix says Fannie Mae must own the existing mortgage. Freddie’s rule is reported to work similarly for its no-cash-out payoff. Your lender checks who owns your current loan.
- Government loans. FHA stopped insuring new mortgages on properties with PACE assessments in December 2017, according to the Federal Register. Industry sources say VA and Federal Home Loan Bank programs are restricted as well. Lendmire’s piece VA Cash-Out Refinance Requirements for a Home With a PACE Assessment covers that side.
- Delinquent PACE amounts. Past-due assessments on the tax bill add to what must be paid off.
- A new PACE assessment after you refinance. It can recreate the lien problem for your next sale or refinance.
Occupancy matters too. This article covers principal residences. If the home is a second home, the cash-out cap drops to 75%, and the rest of the rules still apply.
Does the New CFPB Rule Change Any of This?
No, not the lien problem. The CFPB’s PACE rule applies Truth in Lending and ability-to-repay requirements to residential PACE loans. It was finalized in December 2024 and was scheduled to take effect on March 1, 2026. Confirm its current status before relying on it. The rule adds disclosure and repayment-ability checks when you take on PACE. It does not change the super-priority status of the lien, so the Fannie and Freddie payoff rule still stands.
What Does the Decision Look Like in Practice?
Picture a homeowner with a priority PACE assessment on a one-unit primary home. Their value is high enough that, at 80% LTV, the new loan covers the existing mortgage, the PACE payoff and closing costs. That homeowner has a clean path: cash-out, PACE retired, new first mortgage. The exact numbers vary by lender and program and follow a full review of property, leverage, and credit.
Now take a homeowner whose value barely covers the existing mortgage plus the PACE balance at that leverage. Cash-out will not reach, and the lender looks at whether a limited cash-out with the PACE left in place applies. A third homeowner has plenty of equity but wants to keep the PACE because it is “cheap.” The guide says no to cash-out there.
Budget is the real shift. A payoff folded into the new mortgage moves that cost from your tax bill into your mortgage payment. It may also change how long you are paying for those upgrades. Where taxes are escrowed, the old PACE amount came out of that account too. A 2023 CFPB report, as summarized by the National Consumer Law Center, found PACE loans increase negative credit outcomes, particularly mortgage delinquencies when paid through escrow. That is advocacy commentary on a federal report, so weigh it that way.
Cash-out also carries loan-level price adjustments in the agency pricing, and mortgage insurance applies above 80% LTV. Cancellation is automatic at 78%. These are mechanics for your Loan Estimate, not a quote. Final terms depend on the lender’s guidelines, the property type, and the borrower’s complete credit picture.
Is cash-out the wrong tool sometimes? Yes. If you can pay PACE from savings, or your equity is thin and the PACE is small, a plain payoff or a limited cash-out may fit better. 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
PACE (Property Assessed Clean Energy): A financing program for energy upgrades, repaid through your property tax bill.
Lien priority: The order in which debts get paid if the home is sold or foreclosed. A first-priority lien is paid first.
Limited cash-out refinance: A refinance that pays off your current mortgage and closing costs, with only small cash back to you.
Seasoning: The minimum time you must have held title or the existing loan before a cash-out refinance.
Loan-to-value (LTV): Your loan amount divided by your home’s value, shown as a percentage.
Reserves: Money you still have in liquid accounts after closing.
Frequently Asked Questions
Can I refinance my first mortgage and leave my PACE loan alone?
Usually not with a conventional loan. If the PACE has priority over the mortgage, the agencies will not buy the loan while it remains. The exception is limited: when equity is too thin to pay it off, a limited cash-out with PACE kept in place may be underwritten.
Is paying off PACE with a refinance always treated as cash-out?
No. Fannie Mae carves out PACE and debt used solely for energy improvements from its usual limited cash-out restriction.
Do I have to pay off the whole PACE balance?
Yes, when the PACE lien takes priority over the first mortgage. The payoff has to be complete at or before closing, not partial. A current payoff statement from the PACE administrator sets the number.
What if my PACE was taken out before July 2010?
Fannie waives its prohibition for qualifying older PACE loans when specific purchase-date conditions are met. The lender must first try to qualify you for a payoff refinance.
Can I get a conventional cash-out refinance if I decline the payoff?
Not when you have enough equity. Fannie’s guide makes borrowers who have sufficient equity but choose not to pay off the PACE ineligible for cash-out.
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. Lendmire’s cash-out refinance programs are arranged through wholesale lenders, subject to lender guidelines and full file review. Nothing here is a commitment to lend.
To see how a PACE payoff would work on the home you live in, request a scenario review with Lendmire.
For current guidelines and terms, see Lendmire’s conventional loan 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. Consumer Finance & Fintech Blog (law firm)
2. Fannie Mae Selling Guide B5-3.4-01, PACE Loans
3. Federal Housing Finance Agency
4. Fannie Mae Selling Guide B2-1.3-02 Limited Cash-Out
5. Fannie Mae Selling Guide B2-1.3-03, Cash-Out Refinance Transactions
6. Freddie Mac Guide Section 4301.5
7. FHFA Statement on Energy Retrofit Loan Programs
8. Federal Register, FHFA PACE Request for Input
9. National Consumer Law Center
This article is part of Lendmire’s cash-out refinance program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: Should You Use a Conventional Cash-Out Refinance to Fund a Renovation? · Can You Sell Your House After a Conventional Cash-Out Refinance? · Can You Get a Conventional Cash-Out Refinance on a Home With No Mortgage?
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
- Mortgage Loan Originator · NMLS# 1129696 · Verify on NMLS Consumer Access
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Legal disclosures. Lendmire (NMLS# 2371349) is a state-licensed mortgage brokerage that arranges financing through wholesale lender relationships. Lendmire is not a direct lender, depository institution, or registered financial advisor. The discussion above is general informational content about real estate financing — it is not financial, legal, or tax advice, and readers should consult licensed professionals for guidance on their individual circumstances. Loan inquiries are subject to lender underwriting; this article does not represent a commitment to lend. Loan terms, rates, and qualification standards vary by borrower, property, and state, and are subject to change at any time. Equal Housing Opportunity. NMLS Consumer Access: nmlsconsumeraccess.org.