The Quick Read: It depends on how much equity you have and what the new payment looks like next to the old ones. A cash-out refinance can lower your debt-to-income ratio (DTI, your monthly debts divided by gross monthly income) by folding several payments into one mortgage payment. A personal loan adds a new installment payment, so it helps only if that payment is smaller than the ones it replaces. Cash-out suits homeowners with real equity who need a big drop in monthly obligations. A personal loan suits people with little equity, or those who want to leave a good mortgage alone.
The Honest Answer First
Neither option lowers DTI automatically. Both trade a pile of existing payments for one new payment. The question is whether the new payment is smaller than the pile.
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.
A cash-out refinance replaces your current first mortgage with a larger one. The extra money pays off cards, auto loans, or other debts at closing. Those payments leave your DTI. Your new housing payment goes in. Lendmire’s cash-out refinance programs page covers the program side of this.
A personal loan leaves your mortgage alone. It pays off the other debts, then adds its own payment. Fannie Mae counts installment debts such as personal loans in DTI when more than ten payments remain, according to its Selling Guide on monthly debt obligations. Paying off cards removes their minimums but puts a loan payment in their place.
Both routes carry real risks, covered below.
How DTI Actually Works
DTI is total monthly debt payments divided by gross monthly income. The lender adds your housing payment, car payments, student loans, card minimums, and other obligations. Then it divides by income before taxes.
The Fannie Mae Selling Guide on debt-to-income ratios sets the framework agency loans follow. Manually underwritten loans carry a ceiling of 36% or 45%, depending on credit score and reserve factors from the Eligibility Matrix. Automated underwriting can allow more. Across the wholesale conventional programs Lendmire places files with, the automated finding governs most files, with a total ratio ceiling of 50%. Everything is subject to lender guidelines and full file review.
One catch matters here: Fannie Mae notes the maximum ratio may be lower on cash-out refinances underwritten through its automated system. So a cash-out gets a tighter test than a plain rate-and-term refinance.
You can change DTI two ways. Shrink the monthly debt on top, or grow the income on the bottom. These two loans only touch the top.
Side-by-Side
| Factor | Cash-Out Refinance | Personal Loan |
|---|---|---|
| Collateral | Your home | None (unsecured) |
| Leverage | 80% LTV on a one-unit primary residence; 75% on two- to four-unit primary residences, second homes, and investment property | Not tied to home value |
| Credit floor | 620 decision score on wholesale conventional | Set by each lender |
| Mortgage insurance | Above 80% LTV; wholesale no-MI lane is the exception | None |
| Occupancy | Primary residence, second home, or investment property; occupancy sets leverage | Not relevant |
| Documentation | Income, assets, appraisal, title | Income and credit review |
| Equity needed | Yes | No |
| Effect on DTI | Old debts leave; new housing payment replaces them | Old debts leave; new loan payment added |
| Risk if you default | Foreclosure | Credit damage, collections |
Two details in that table need explaining. First, the wholesale no-MI lane reaches 89.99% LTV with no mortgage insurance at a 680 score and a 50% ratio on a thirty-year fixed primary residence with a conforming balance. It has its own six months of seasoning. Second, Texas homestead cash-outs are capped at 80% of the home’s value by the state constitution, and that wholesale lane is not written there. Leverage, reserves, and pricing vary by lender and program; the final terms follow the full file review.
When a Cash-Out Refinance Is the Better Fit
A cash-out refinance fits when the new mortgage payment is meaningfully smaller than your current mortgage payment plus the debts you are paying off.
Picture a homeowner carrying a mortgage, two car loans, and several maxed cards. The monthly minimums on those other debts eat a large share of income. Rolling them into the mortgage replaces five or six payments with one. Spread over a long mortgage term, the combined payment can come in well under the old total.
A few conditions make this work:
- You have equity. The lender caps leverage at a percentage of appraised value. A low appraisal shrinks the cash available.
- You qualify under the cash-out test. The first mortgage being paid off must be at least 12 months old, and at least one borrower must have been on title for six months. Freddie Mac’s guide sets that title requirement, with exceptions for things like inheritance and legal awards.
- You want one payment. Fewer accounts means fewer ways to miss one.
- The debts you are paying are the expensive kind. Card balances and short-term loans are the usual targets.
Underwriting also helps on revolving debt. Fannie Mae’s guide generally lets revolving accounts paid at closing drop out of DTI. Your loan officer will confirm what applies to your file.
Watch the Label
Paying off cards with refinance proceeds is a full cash-out, not a rate-and-term refinance. The rate-and-term (limited cash-out) refinance allows only 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. Cash-out pricing applies to the real thing, and Freddie Mac notes a credit fee applies to cash-out refinances, with exemptions for special purposes.
The Backfire Cases
Cash-out can raise DTI. Three common ways:
1. The new payment is bigger than the old one. A larger loan can push the housing payment above the old mortgage payment, especially if you gave up a good existing mortgage. The term resets and total cost over time can rise.
2. Mortgage insurance enters the payment. Above 80% LTV on the agency path, it is required, apart from that wholesale no-MI lane. Cancellation is possible at 80% of original value on request, and the servicer must end it at 78%. Exact terms depend on the lender’s guidelines, property type, leverage, and a full review of the borrower’s file.
3. The debts you pay off were small. If the old payments were modest, a bigger mortgage payment can outweigh them. Terms vary by lender guidelines, property type, leverage, credit profile, and full file review.
There is also a human risk. In the CFPB’s study of cash-out refinance borrowers, those borrowers’ credit scores improved sharply at first, then gradually worsened, and their card balances drifted back toward earlier levels. Clearing cards helps only if the cards stay clear.
Then there is the big shift: unsecured debt becomes debt secured by your home. Default on a card and the lender sends collectors. Default on a mortgage and the lender can foreclose.
When a Personal Loan Is the Better Fit
A personal loan fits when you lack equity, want to keep your mortgage untouched, or need to fix a smaller debt problem.
Say your current mortgage terms are good and your equity is thin. A cash-out would mean giving up that mortgage for a bigger one. A personal loan avoids that. It needs no appraisal, no title work, and no home as collateral.
It works best when:
- You have limited equity. No equity, no cash-out.
- The debt is modest. A small balance does not justify replacing a whole mortgage.
- You have a mortgage you want to keep. Leaving it alone preserves its terms.
- Your credit and income are strong. The loan is unsecured, so approval rests on you, not the house.
Here is the trap, and it is the one most comparison pages skip. A personal loan with more than ten payments left counts in DTI. So it helps only when its payment is lower than the payments it replaces. Stretch a card payoff over a longer loan term and the payment may drop. Compress it into a short term and the payment may be higher than the old minimums.
Timing matters too. Taking a personal loan right before a mortgage application adds a new account and a new payment to your file. If a mortgage is next on your list, talk to a loan officer before you borrow. Installment loans paid down to ten or fewer remaining payments may not have to be counted, which sometimes changes the order you do things in.
Credit condition matters for both options. If your credit has taken damage from the debt itself, you may not get strong terms on either a personal loan or a cash-out refinance, and each lender sets its own standards.
Government Loans Change the Picture
If you already have an FHA or VA mortgage, the streamline refinances do not help here.
An FHA Streamline cannot pay off non-mortgage debt, and no cash may be taken out, per an FDIC summary of the program. The VA IRRRL is likewise a VA-to-VA loan, and the VA treats its cash-out loan as a separate product. That cash-out loan lets eligible borrowers take equity to pay off debt, and it requires a Certificate of Eligibility and living in the home.
Across the wholesale programs Lendmire works with, the practical path for an FHA or VA borrower who wants to consolidate is a full cash-out under that program, or a conventional cash-out. The streamlines are built for lowering the cost of an existing loan, not for rolling in credit cards.
A Practitioner’s Rule of Thumb
First, how big is the gap between your current monthly debts and what one new loan would cost? If the gap is small, neither option is worth the cost.
Second, how much equity do you really have after a realistic appraisal? It is easy to overestimate. A lower value shrinks the cash and may push leverage past program limits.
Third, what happens to your habits? A consolidation that clears the cards and then watches them refill leaves you worse off than before.
Run both options with the same debts on paper, using your own numbers. Compare the new total monthly obligations against the old, then divide by your gross income. Choose the lower result, as long as the loan length and the collateral risk are ones you can live with.
Quick Decision Checklist
- Equity under what a cash-out needs? A personal loan is the realistic path.
- Mortgage worth keeping as is? Lean toward the personal loan.
- Large pile of payments and real equity? Price a cash-out.
- DTI is the barrier to a different mortgage? Pay close attention to what each option does to the monthly total, and sequence the steps with a loan officer.
- Existing FHA or VA loan? Skip the streamline. Look at that program’s cash-out.
- Unsure you can stop using the cards? Build that into the decision before you borrow.
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 your current one and gives you the difference in cash.
Limited cash-out (rate-and-term) refinance: A refinance that pays off the existing loan and costs, with only small incidental cash back.
Installment debt: A loan repaid in fixed payments over a set term, such as a personal loan or auto loan.
Seasoning: The minimum time you must have owned the home, or had the loan being paid off, before a new loan is reviewed.
LTV (loan-to-value): The loan balance divided by the home’s appraised value.
Frequently Asked Questions
Does a cash-out refinance always lower my DTI?
No. It lowers DTI only when the new mortgage payment is smaller than your old mortgage payment plus the debts you pay off. If the old debts carried small payments, a larger mortgage can push DTI up. Cash-out also faces its own ratio test, and Fannie Mae notes the maximum may be lower for cash-out loans run through automated underwriting.
Does a personal loan count against my DTI when I apply for a mortgage?
Yes, in most cases. Fannie Mae counts installment debts, including personal loans, when more than ten payments remain. The loan helps only if its payment is lower than the payments it replaced. If it adds a payment on top of your existing debts, DTI rises.
Do I have to close the credit cards I pay off in a cash-out?
Not necessarily. Under agency guidelines, revolving accounts paid at closing can often be excluded from DTI without closing them. A lender may still ask you to close them, so confirm with your loan officer before assuming either way.
Can an FHA Streamline or VA IRRRL roll in my credit card debt?
No. The FHA Streamline allows no cash out and cannot pay off non-mortgage debt. The VA IRRRL is a VA-to-VA loan, and cash-out is a separate VA program. If you hold an FHA or VA loan and want to consolidate, look at a full cash-out under that program or a conventional cash-out.
How much equity do I need for a cash-out refinance?
It depends on the program and occupancy. Conventional cash-out runs to 80% LTV on a one-unit primary residence and 75% on two- to four-unit primary residences, second homes, and investment property. The wholesale no-MI lane reaches 89.99% on a qualifying primary residence. All figures are subject to lender guidelines and full file review, and nothing here is a commitment to lend.
The Balanced Verdict
Pick the cash-out refinance when you have equity, a mortgage you are willing to replace, and a pile of payments large enough that one new payment truly shrinks the total. Pick the personal loan when equity is thin, the mortgage is worth keeping, or the debt is small enough that a bigger mortgage would be overkill.
Either way, the test is the same. Add up the new monthly total, divide by income, and compare it with where you started. Also weigh what you are putting at risk and how long you will be paying.
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.
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 that arranges FHA, VA, conventional and jumbo home purchase and refinance financing in 16 states through wholesale lenders. Every option is subject to the lender’s guidelines and full underwriting. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.
Get Started
Ready to find the right loan for you?
See your offer in seconds. No credit pull, no obligation.
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: Monthly Debt Obligations
2. Fannie Mae Selling Guide: Debt-to-Income Ratios
3. Freddie Mac Guide Section 4301.5
4. Freddie Mac Cash-Out Refinance product page
5. CFPB: cash-out borrowers and credit scores
6. FDIC summary of the program
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 Balance Transfer for a Homeowner With Card Debt · Cash-Out Refinance vs Home Equity Loan Within a Year of Buying · Cash-Out Refinance vs Home Equity Loan to Consolidate a Larger Amount of Debt
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
Disclosures. The information presented in this article is general market commentary, not financial, legal, or tax advice. Lendmire is a mortgage brokerage (NMLS# 2371349) — not a direct lender or depository institution — and loan placement is subject to lender underwriting. Nothing in this content represents a commitment to lend. Loan terms, pricing, and program availability vary based on borrower qualifications, property characteristics, and state of subject property, and are subject to change at any time. Lendmire complies with Equal Housing Opportunity requirements. Consumer access: nmlsconsumeraccess.org.