The Quick Read: The lender requires the PACE lien to be paid off at closing, using your new loan’s proceeds. It cannot stay on the property. The payoff comes out of your cash-out amount, so it shrinks the check you receive and uses up part of your borrowing room. Whether the refinance works depends on whether your equity covers the payoff, the closing costs, and the new loan.
Key Takeaways
- A PACE assessment sits ahead of your mortgage in line, and FHA will not insure a new loan on a property that still carries it.
- The cash-out refinance is a way out: the new loan pays the assessment off, so the lien does not stay in place.
- Cash-out on FHA reaches 80% of the home’s value, so every dollar of payoff uses part of that 80%.
- Release mechanics vary by program and county, so get the payoff figure early.
- Other kinds of solar debt are not automatically PACE. Check which one you have.
Key Terms Defined
PACE assessment: A home-improvement loan repaid through your property tax bill, usually for solar, windows, HVAC, or storm hardening.
Lien priority: The order in which debts get paid if the home is sold or foreclosed. Tax-bill assessments usually go first.
First-lien position: Being first in that order. FHA wants its loan there.
Payoff statement: A written figure from the PACE administrator or county. It shows what it takes to clear the assessment on a given date.
Cash-out refinance: A new, larger mortgage that pays off the old one and hands you the difference in cash.
Rate-and-term refinance: A new mortgage that replaces existing debt without giving you extra cash beyond closing costs.
Loan-to-value (LTV): The new loan balance divided by the home’s appraised value.
Title exception: A line in the title report flagging something recorded against the property, such as a PACE lien.
FHA cash-out estimate
Seeded with an example value, a balance to match, and a round cash request; change any field.
Editable benchmark: 7.18% as of November 5, 2026 · Freddie Mac 30-year average via FRED®. A conventional market reference, not an FHA cash-out refinance quote.
Illustrative starting assumptions: a $350,000 home value, a $193,000 current balance, the FHA cap on a principal residence with the upfront premium financed, a thirty-year term at the current Freddie Mac benchmark, and property taxes and insurance estimated at typical national rates. Every field is editable.
An illustration, not a Loan Estimate, an approval, a quote, or a commitment to lend. The rate shown is the weekly Freddie Mac thirty-year conventional benchmark, used as a market reference; an FHA cash-out is priced by the lender at lock, and this is not an FHA cash-out refinance quote. HUD’s cap limits the base loan; the upfront premium is financed on top of the capped base loan; the monthly premium for the first year follows the snapshot’s schedule. Cash available means the base loan the cap permits less the balances retired, before closing costs, which this calculator leaves out. The line figure applies the line program’s combined loan-to-value ceiling to the same value and balance. Taxes and insurance are estimates you can edit. Licensed in sixteen states for consumer mortgages.
What Makes a PACE Lien Different From Other Debt?
A PACE lien is repaid with your property taxes, and that gives it a special place in line. If you stop paying, the assessment collects ahead of your mortgage. That ranking is the whole story.
FHA insures loans for lenders. The insurance only makes sense if the FHA-backed loan sits in first position. A PACE lien jumps ahead of it. So a new FHA cash-out refinance cannot close with PACE still sitting there.
Picture the home as a line of creditors. The mortgage normally stands first. A PACE assessment steps in front. Paying it off puts the mortgage back at the head of the line.
Three other things make it tricky:
- It is easy to miss. It shows up on your tax bill and as an exception on the title report, not on your credit-card-style statements.
- It is not government-backed. Many homeowners assume it is. It is not.
- It travels with the home. It stays attached to the property rather than to you, so it has to be dealt with when the home is sold or refinanced.
How the Payoff Works, Step by Step
The cash-out lender treats the PACE payoff as a required use of the new loan, not an option. Here is the sequence across the wholesale programs Lendmire places for FHA loans.
1. The lien is found. It appears on your property tax bill and as a title exception once the title company searches the property. Sometimes you tell the lender up front. Sometimes the title search tells everyone.
2. The basic cash-out screen. FHA cash-out is for a principal residence you live in. The home needs to have been owned and occupied for 12 months before the case number is assigned. Cash-out reaches 80% LTV. These specifics are subject to lender guidelines and a full review of property, leverage, and credit.
3. The payoff figure is requested. It comes from the PACE administrator or the county. You do not set it. It can include accrued interest and fees.
4. Underwriting. The lender builds the new loan amount: your existing mortgage, the PACE payoff, closing costs, and the financed upfront mortgage insurance premium. All of that has to fit under the 80% cap.
5. Appraisal. A normal FHA appraisal. Solar panels, windows, and HVAC paid for with PACE are valued for what they add to the home, not for what they cost.
6. Closing. The title company uses your loan proceeds to pay the PACE administrator or tax collector. It then confirms the lien is released or the assessment is removed from the tax roll, so the new FHA loan sits first. Every figure here varies by lender and program — guidelines, property type, leverage, and credit profile all apply.
Release mechanics vary by program and county. Some release the lien on payment. Others remove the assessment at the next tax cycle. The title company sorts out which applies.
What the Underwriter Is Really Asking
Four things decide the file:
- Is the PACE lien actually satisfied at closing?
- Does your equity cover the payoff, closing costs, and the new loan within the 80% limit?
- Do you meet the ownership and occupancy rules?
- Do your credit and ratios hold up?
On ratios, the base pair is 31/43. That means housing costs at about 31% of income and total debts at about 43%, with no compensating factors. Documented compensating factors reach 40/50 at the top tier, and the automated underwriting finding governs most files. Everything stays subject to lender guidelines and full file review.
Here is a point that helps. Removing the PACE assessment should remove it from your tax bill. So your escrowed taxes may drop even as the mortgage balance climbs. The underwriter counts the new total payment, so compare total monthly cost, not just the mortgage line.
A Worked Example (Percentages, Not Dollars)
Say you run the numbers on a home with a modeled value of 100%. These inputs are assumptions for illustration, not market data.
| Line item | Share of home value |
|---|---|
| FHA cash-out maximum | 80% |
| Existing mortgage balance | 60% |
| PACE payoff | 6% |
| Room left before costs | 14% |
That 14% has to cover closing costs and the financed upfront premium of 1.75% of the base loan. Whatever is left is your cash out.
Now change one input. If the PACE payoff were 15%, there would be negative room. The cash-out would not work as structured. The payoff is not negotiable, so something else has to give: more equity, a smaller cash goal, or a different plan.
Notice what happens when equity is thin. The PACE payoff does not just reduce your cash. It can erase it.
When Did FHA Change Its Mind?
FHA’s position moved once, and it matters to anyone reading older advice online.
FHA briefly allowed PACE properties under conditions. One was that only the delinquent portion could outrank the FHA mortgage. That approach was reversed. HUD announced that FHA would no longer insure new mortgages on properties that include PACE assessments, citing the priority lien status these assessments hold in a default.
HUD Mortgagee Letter 2017-18 states the policy directly. Properties encumbered with PACE obligations are not eligible for FHA-insured forward mortgages. The letter names two risks: the lien’s priority and the fact that its effect on property value can be unknown or miscalculated.
The same letter closes the loop for borrowers. PACE obligations are existing debt that can be paid off with a rate-and-term refinance, and policies allowing a cash-out refinance to pay off PACE remain unchanged. That is the HUD policy as transmitted by that letter. Your lender confirms how it applies to your file.
So the rule has two halves: PACE cannot stay, and PACE can be paid off through either refinance.
How It Compares With Conventional Loans
| Factor | FHA | Conventional |
|---|---|---|
| PACE stays in place | No | Only if it does not outrank the first mortgage |
| Payoff in a refinance | Allowed, cash-out or rate-and-term | Allowed |
| Limited exception | None found | Limited cash-out with PACE left in place |
On the conventional side, Fannie Mae’s Selling Guide will not buy loans on properties with an outstanding PACE loan unless the program does not give it priority over first mortgages. It also offers a narrow exception, a limited cash-out refinance that leaves the PACE loan in place. FHA’s version is stricter about keeping PACE in place.
Rate-and-Term or Cash-Out: Which Fits?
Both retire PACE. The difference is what else the loan does.
A rate-and-term refinance on a principal residence you have occupied for the previous twelve months reaches 97.75% with an appraisal. Proceeds go to existing debt and closing costs. That higher leverage can leave more room for the PACE payoff when you do not need cash.
A cash-out refinance caps at 80%, but it also lets you take money out. The PACE payoff comes from the same pool.
Here is how the choice usually plays out:
- Little or no cash needed: Rate-and-term is usually the natural fit, since the payoff is the main job.
- Real cash needed beyond the payoff: Cash-out is the route, but only if equity clears 80%.
- You hold an existing FHA loan: Ask your loan officer about the FHA Streamline, which refinances an existing FHA loan without an appraisal. How a PACE assessment is treated on a streamline is not something to assume, so raise it early and have it confirmed for your file.
(On a broker’s desk, this is a “which pool is bigger” question. The answer changes with each file.)
Where the General Rule Breaks
The basic rule holds. The edges are where files get stuck.
Buying a home with PACE. A more recent HUD Mortgagee Letter says the sales contract must include a clause specifying that the seller will satisfy the PACE obligation at or before closing. FHA still treats PACE as something that must be retired.
PACE added after an FHA loan already exists. HUD warned that PACE obligations placed on already-outstanding FHA-insured mortgages are risky for borrowers and potentially violate the terms of their mortgage. A later refinance would still require payoff.
Reverse mortgages. Properties with PACE obligations are not eligible for an FHA-insured reverse mortgage.
A rental or second home. FHA cash-out is for the home you live in. Occupancy decides the leverage, and this product does not extend to non-owner-occupied property.
Other solar debt. PACE is tax-assessment financing. A solar loan, lease, or lien filed with a different office is a different animal. HUD’s PACE policy does not address those, so do not assume they follow PACE rules. Your lender and title company confirm which type you have.
Low equity. If the payoff plus your current mortgage already crowds the 80% line, there may be nothing left. That is a common way PACE kills a cash-out.
Two Misconceptions Worth Clearing Up
“FHA won’t touch a home with PACE.” It will, as long as the new loan pays the assessment off. A refinance that retires it, including cash-out, is explicitly permitted.
“A new federal rule fixes this.” The CFPB’s final rule applies ability-to-repay and disclosure requirements to new PACE loans. It was scheduled to take effect on March 1, 2026. It governs how new PACE loans get made. It does not change lien priority, and it is not retroactive, so it does not change what an FHA lender requires today.
A third one comes up a lot. PACE is not government-backed. The CFPB states that the U.S. government does not pay for or insure PACE loans, and that you may lose your home if you do not make the payments.
What the Decision Looks Like in Practice
Start with the payoff figure. Ask the PACE administrator for a payoff statement early. It carries a per-diem amount and is good only through a stated date, so the title company may need to refresh it before closing.
Then run three comparisons:
1. Total monthly cost before and after. Swapping a tax-bill assessment for a bigger mortgage changes the shape of the payment. Compare the full number.
2. Cash left versus cash needed. If the payoff eats most of your cash-out, ask whether a rate-and-term or paying from savings makes more sense.
3. Cost of waiting. If you are a few months from the 12-month ownership and occupancy mark, timing can matter.
Documents to Gather
- Your most recent property tax bill (shows the assessment)
- The PACE contract or program paperwork
- A payoff statement from the administrator
- Your current mortgage statement
- Standard income, asset, and ID documents
Common File Errors
- Assuming the tax bill number equals the payoff. It does not. The payoff can include interest and fees.
- Starting the file before knowing the payoff.
- Treating a solar lease like PACE, or the reverse.
- Forgetting the financed upfront premium when counting room under the cap.
Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
Frequently Asked Questions
Can I close an FHA cash-out refinance and leave the PACE lien in place?
No. FHA policy does not allow a new FHA loan on a property that stays encumbered by PACE.
Does the PACE payoff come out of my cash-out?
Yes. The payoff is a required use of proceeds, so it reduces what you receive. It also counts toward the 80% LTV limit, so a large payoff can leave little or nothing for you. Final terms depend on lender guidelines, property type, leverage, and the borrower’s complete credit picture.
Is the PACE lien payoff the same as my tax bill amount?
Not necessarily. The payoff comes from the administrator or county and can include accrued interest and fees. Ask for a payoff statement instead of estimating from the tax bill.
Does an FHA Streamline refinance handle PACE?
That is a question for your loan officer. The streamline is for an existing FHA loan with no appraisal, but PACE treatment on a streamline is not something to assume. Have the lender confirm it for your file before you plan around it.
Will paying off PACE lower my property taxes?
It should remove the assessment from your tax bill, which can lower escrowed taxes. Your mortgage balance rises, though, so compare the full monthly cost.
Talking It Through
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. As a mortgage broker that works with wholesale lenders, Lendmire matches the file to the program, and the right fit depends on your equity, your payoff figure, and your goals. Every program figure here is subject to lender guidelines and full file review, and nothing here is a commitment to lend.
For your own numbers, request a scenario review with Lendmire.
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
2. HUD Mortgagee Letter 2017-18
3. Fannie Mae Selling Guide: Property Assessed Clean Energy Loans
5. Federal Register: Residential Property Assessed Clean Energy Financing
6. CFPB states
This article is part of Lendmire’s FHA cash-out refinance program — full qualification details, guidelines, and scenarios live on the program page.
Related reading: FHA Cash-Out vs Conventional Cash-Out for a Borrower Leaving FHA · FHA Cash-Out vs Conventional Cash-Out for a Divorce Buyout · How to Switch From an FHA Streamline to an FHA Cash-Out
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
- Mortgage Loan Originator · NMLS# 1129696 · Verify on NMLS Consumer Access
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- 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.