The Quick Read: It depends on whether you want to keep your current first mortgage. A cash-out refinance replaces that loan with a new one and hands you the difference. A home equity loan leaves it alone and adds a second lien. Either way, a student loan in deferment still counts as debt when a lender reviews the file.
The cash-out refinance fits a borrower who wants one housing payment and has a first mortgage worth replacing. The home equity loan fits a borrower with a first mortgage worth keeping, who needs a smaller sum and can carry two payments. Deferment does not make the debt disappear in either case.
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: 7.18% as of November 5, 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.
Side-by-Side
| Factor | Cash-Out Refinance | Home Equity Loan |
|---|---|---|
| Structure | New first mortgage replaces old | Second lien behind first |
| Payments after closing | One housing payment | Two housing payments |
| Leverage (one-unit primary) | Up to 80% LTV | Lender sets own limit |
| Credit floor | 620 decision score, wholesale conventional | Set by each lender |
| Mortgage insurance | Only above 80% LTV (one wholesale lane differs) | Not an agency feature |
| Occupancy | Primary, second home or investment | Lender sets own rules |
| Documentation | Full file, appraisal, student loan statement | Varies by lender |
| Deferred student loan | Counted by agency rules | Usually reviewed, method varies |
Program figures reflect the wholesale conventional programs Lendmire works with. They are subject to lender guidelines and full file review.
The Deferment Problem Both Options Share
A paused payment is not a zero payment on paper. Fannie Mae’s Selling Guide says deferred installment debt must be included in recurring monthly debt. If the credit report shows no payment, the lender may use 1% of the balance or a fully amortizing payment based on the documented terms. If the borrower is on an income-driven plan with a documented zero-dollar payment, the lender may qualify with no student loan obligation counted in the ratio.
Freddie Mac’s Guide Section 5401.2 goes a step further. It requires an amount greater than zero in the debt-to-income ratio for student loans in deferment, forbearance or repayment. The wholesale conventional programs allow a total ratio ceiling of 50% when the automated finding supports it, but under Freddie Mac’s rule the deferred payment still sits in the ratio.
FHA works differently. HUD Mortgagee Letter 2021-13 lets the lender use the documented payment when it is above zero, or 0.5% of the balance when the credit report shows $0. That matters if you hold an FHA loan today and are weighing options.
Deferment is also not interest-free for most loans. Interest generally accrues, and unpaid interest can be added to the balance. The MOHELA student loan servicer’s repayment options page notes that subsidized loans are the exception during deferment. The balance can grow while payments are paused, and the real payment shows up later.
A credit report that shows $0 for a deferred loan with no paper behind it can stall a file. The fix is simple. Pull the latest servicer statement or letter before the application goes in.
When a Cash-Out Refinance Is the Better Fit
A cash-out refinance works best when the numbers on your first mortgage support replacing it. Lendmire’s cash-out refinance programs page covers the structure in more detail.
The basic limits on a conventional cash-out: up to 80% LTV on a one-unit primary residence, and 75% on two- to four-unit primary residences, second homes and investment property. Occupancy sets the leverage. The first mortgage being paid off must be at least 12 months old, measured note date to note date. A borrower must also have been on title for six months, with exceptions for delayed financing, inheritance and legal awards. Final terms depend on the lender’s guidelines, the property type, and the borrower’s complete credit picture.
It tends to fit when:
- You want one payment instead of a first mortgage plus a second.
- Your current first mortgage is not one you are protecting.
- You need a larger sum than a second lien usually delivers.
- Your credit sits at or above a 620 decision score and your ratio holds up with the deferred payment counted.
- You want a fixed structure on the full balance.
One wholesale lane goes beyond the 80% limit above, reaching 89.99% LTV with no mortgage insurance at a 680 score and a 50% ratio. It is a thirty-year fixed on a primary residence at a conforming balance, with its own six months of seasoning. Mortgage insurance applies above 80% LTV, and this lane is the one exception to that rule. It is not written on a Texas homestead, where a Section 50(a)(6) cash-out is capped at 80% of the home’s value by the state constitution. Each figure is subject to lender guidelines and a complete review of property type, leverage, and credit.
There is also a narrow edge case. Fannie Mae’s student loan cash-out refinance lets proceeds pay off student debt, with the cash-out pricing adjustment waived. At least one loan must be paid in full, proceeds go directly to the servicer at closing, and cash back to the borrower is capped. When the loan is paid off, it leaves your DTI. This option is not available on every file, and it is subject to lender guidelines.
When a Home Equity Loan Is the Better Fit
A home equity loan makes sense when your first mortgage is the asset. It is typically structured as a lump sum, usually with a fixed interest rate.
It tends to fit when:
- You hold a first mortgage you do not want to touch.
- You need a smaller sum.
- You can comfortably carry two housing payments.
- You can document how the lender should count the deferred student loan.
Here the first mortgage stays as it is. The lender writes the second lien under its own rules, and no agency rule governs how it counts a deferred payment. Treatment varies from lender to lender, so ask how a given lender handles it before you apply.
Lendmire is a mortgage broker arranging first-lien programs through wholesale lenders. Home equity loans are a different product, and the comparison above is meant to help you decide which route to ask about, not to price either one.
Should You Pay Off a Deferred Loan at All?
This is the question the comparison often skips. If the loan is federal, paying it with home equity gives up federal repayment protections. That includes income-driven repayment and forgiveness eligibility. StudentAid.gov notes that deferment and forbearance can also affect forgiveness options such as PSLF.
You are also changing the kind of debt. Student debt that is unsecured becomes debt secured by your home. You could lose the home if you cannot repay, so it is worth exploring alternatives, such as credit counseling, before borrowing against your home to pay debts.
For a private loan, the trade-off is different. There may be fewer protections to lose, so the comparison leans more on structure and cost.
A Scenario in Percentages
Picture a homeowner with a primary residence, a first mortgage past 12 months old, and a federal loan in deferment. The home is valued so that an 80% cash-out limit leaves a modest cushion over the current balance. How the deferred loan counts depends on the program: Fannie Mae, Freddie Mac and FHA each use their own method when the lender qualifies the file. Leverage, reserves, and pricing vary by lender and program; the final terms follow the full file review.
Route one: the cash-out refinance replaces the first mortgage. The borrower has one payment, and the deferred loan counts in the ratio under the program’s method unless it is paid off at closing under the student loan program.
Route two: a home equity loan sits behind the first mortgage. The borrower keeps the first loan, adds a second, and the lender decides how to count the deferment.
In both routes, stress-test the budget for the day deferment ends. Build the file around that payment, not the paused one.
Common Mistakes
- Assuming a deferred loan never counts. Agency rules generally include it, with a narrow exception at Fannie Mae for a documented zero-dollar income-driven payment.
- Assuming every program uses the same payment method. Fannie Mae, Freddie Mac and FHA differ.
- Applying with no student loan documentation when the report shows $0.
- Expecting a streamline refinance to pull cash out. FHA Streamline and VA IRRRL are rate-and-term options on existing government loans only.
- Ignoring that interest keeps accruing during deferment.
A Balanced Verdict
Neither option wins by default. The cash-out refinance fits when the first mortgage is up for replacement and you want one payment. The home equity loan fits when the first mortgage is worth keeping and the sum is smaller. Both put the home behind the debt, and both count the deferred loan.
The real decision may come before either product. If the loan is federal and the pause is protecting your budget, a more affordable move may be to leave it where it is. 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. Subject to lender guidelines and full file review; nothing here is a commitment to lend.
Key Terms Defined
Deferment: A pause in student loan payments, during which interest may still accrue.
DTI (debt-to-income ratio): Your monthly debts divided by your monthly income.
LTV (loan-to-value): The loan balance as a percentage of the home’s value.
Seasoning: The minimum age of the loan being refinanced, or time on title.
Capitalization: Unpaid interest added to the loan principal.
Frequently Asked Questions
Does a student loan in deferment count against me for a cash-out refinance?
Yes, in most cases. Fannie Mae allows a narrow exception when an income-driven plan has a documented zero-dollar payment, while Freddie Mac requires an amount greater than zero in the debt-to-income ratio. A lender checks the specific rule it follows.
Can I use either option to pay off student loans?
Generally yes, though the structure differs. A cash-out refinance can send proceeds to the loan, and one conventional program is built for it. A home equity loan gives a lump sum you can use as you choose, under the lender’s rules.
What do I lose by paying off a federal loan with home equity?
You give up federal repayment options such as income-driven plans and forgiveness eligibility. You also turn unsecured debt into debt secured by your home.
How much equity do I need?
A conventional cash-out reaches 80% LTV on a one-unit primary residence, subject to lender guidelines. A home equity lender sets its own limit, so the equity it requires varies by lender.
Can an FHA Streamline or VA IRRRL pull cash out?
No. Both are rate-and-term options for existing government loans. Tapping equity on a VA loan takes a different VA product.
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 B3-6-05, Monthly Debt Obligations
2. Freddie Mac Guide Section 5401.2
3. HUD Mortgagee Letter 2021-13
4. MOHELA Repayment Options (Federal Student Aid servicer)
5. Fannie Mae Selling Guide B2-1.3-03, Cash-Out Refinance Transactions
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 vs Home Equity Loan After Your Home Value Jumps · Cash-Out Refinance vs Home Equity Loan on an Inherited Home to Buy Out Siblings
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.