FHA Cash-Out With a PACE Assessment vs Paying It Off First

The Quick Read: The home cannot close with a PACE assessment still attached, so the balance gets cleared either way. The only choice is timing. You can let the new cash-out loan pay it off at closing, or you can pay it off yourself before you apply. Letting the loan do it is simpler and needs no savings, but the payoff shrinks the cash you walk away with. Paying first keeps your proceeds whole, but you need money on hand.

Who Each Option Is Really For

Rolling the payoff into the cash-out suits a homeowner who has equity, wants some cash, and does not have the PACE balance sitting in a savings account. Paying it off first suits a homeowner who has the funds, wants every dollar of cash-out proceeds, or is not sure the cash-out makes sense at all.

PACE stands for Property Assessed Clean Energy. It is financing for things like solar panels or efficiency upgrades, repaid through your property tax bill. It is not a normal mortgage. But it is secured by the home, and it gets priority treatment if things go wrong.

That priority is why FHA cares. HUD Mortgagee Letter 2017-18 says properties that stay encumbered by PACE are not eligible for FHA-insured forward mortgages. The policy took effect in early January 2018. HUD pointed to the risk to its insurance fund from the PACE lien’s priority and to weaker consumer protections at PACE origination.

Key Terms Defined

PACE assessment: A home-improvement financing repaid through property taxes and secured by a lien on the home.

Cash-out refinance: A new loan that pays off your current mortgage and lets you take part of your equity as cash.

Rate and term refinance: A new loan that only replaces existing debt and covers costs. You receive no cash beyond that.

Lien priority: The order in which claims on a property get paid if the owner defaults.

Mortgage insurance premium: The FHA charge, paid upfront and annually, that protects the lender if the loan fails.

Side-by-Side

Notice that the program rules do not change between the two paths. What changes is where the PACE money comes from and how much is left for you.

How the Rules Work

Across the wholesale programs Lendmire places FHA files with, the cash-out reaches 80% LTV (loan-to-value, the loan as a share of the home’s value). The home must be owned and occupied for 12 months before the case number. Decision scores start at 580 on our network. Ratios start at 31/43 and can reach 40/50 with documented compensating factors. Everything is subject to lender guidelines and full file review.

The mortgage insurance has two parts. The upfront premium is 1.75% of the base loan, and it can be financed. The annual premium runs between 0.15% and 0.75% of the balance depending on term, loan amount and LTV. County loan limits apply and change every year.

Now the PACE piece. HUD’s letter treats a PACE obligation as existing debt and makes its payoff a mandatory obligation. The letter says it can be paid through a rate and term refinance. A copy of the letter hosted by HousingWire also says existing policies allowing a cash-out refinance to pay off PACE stay unchanged. Because that line is brief, ask your loan officer how their guidelines handle it.

One more point from HUD’s Handbook 4000.1 glossary: PACE is collected like a special assessment tax, and it stays with the property when the home is sold. A leftover PACE balance is not something you can wave through. It has to be gone.

When Paying It Inside the Cash-Out Is the Better Fit

This path works best in a few situations.

• You lack the liquid cash. If the PACE balance is more than your savings, letting the loan pay it is the realistic route.
• You wanted cash anyway. If you planned to pull equity for repairs or other debts, one transaction handles both jobs.
• You want a single closing. The title company gets one payoff letter, and the escrow handles it alongside everything else.

Picture a homeowner with solid equity and a PACE balance that equals a big slice of it. She wants a modest amount of cash for a roof. Rolling the payoff in means the new loan covers the PACE balance and her cash, but she needs to check the math first. The payoff counts toward the loan amount, and the FHA cash-out cap is 80% of the home’s value. If the PACE payoff eats most of the available equity, little is left for the roof, and she may find the cash-out cannot cover both.

That is the trade-off. The payoff reduces what you receive, and it also uses up room under the equity limit. Ask for a written estimate of net proceeds after the payoff before you commit.

When Paying It Off First Is the Better Fit

Paying first makes sense in these cases.

• You have the money. Savings, a family loan or another source can clear the balance.
• You want the maximum cash. Your proceeds are not reduced by the payoff.
• You might not need a cash-out at all. Once PACE is gone, a different FHA refinance could fit better.

On that last point, an existing FHA borrower may be able to use the FHA Streamline, which has no appraisal and a limited credit review. It requires a net tangible benefit. Another option is the FHA rate and term refinance with an appraisal, which is a separate program from the cash-out and is not held to its 80% cap. Whether either fits depends on whether you actually need cash. If you do not, a cash-out is the wrong tool.

Paying first does carry its own risks. You need the payoff letter, the payment, and the recorded release in place before the new loan can proceed. If the PACE administrator is slow to release the lien, the refinance waits. Title must show the new FHA mortgage in first position, and HUD requires lenders to preserve first-lien status. A lien that lingers in the records can stall the file.

A Simple Decision Checklist

• If you have no spare cash and need the payoff covered, roll it into the cash-out.
• If you have spare cash and want full proceeds, pay first.
• If you do not need cash, look at rate and term or a Streamline before cash-out.
• If the PACE balance would use up most of your equity under the 80% cap, pay part or all of it first, or skip the cash-out.
• If you are unsure of the balance, request a payoff statement before anything else.

The Steps, in Order

1. Find the balance. Check your tax bill and PACE statements. The lender will also find it in title work.

2. Request a payoff letter. Ask the PACE administrator or county for a current figure. Payoff amounts change as interest accrues, so letters are good only for a set period.

3. Pick your path. Decide whether to pay it yourself or have closing handle it.

4. Apply and appraise. The lender treats the new loan as a cash-out. The appraiser values the home as it stands after the payoff.

5. Close and record. Title confirms the PACE lien is satisfied and that the FHA mortgage is first.

Where Files Go Wrong

• An outdated payoff figure. A balance that grew before closing leaves a shortfall.
• A release that never gets recorded. The money moves, but the lien stays in the records.
• Too little equity. The payoff plus the existing mortgage runs into the 80% cap.
• Occupancy gaps. Cash-out requires an owner-occupied primary residence with the 12-month history.
• Wrong assumptions about other programs. Freddie Mac’s guide, for example, also requires that PACE be paid in full on cash-out and no-cash-out refinances. Rules differ by program, so do not assume one set applies to another.

What PACE Does to Your Budget

The CFPB’s final rule page explains that PACE is now covered by ability-to-repay requirements. It said PACE borrowers were more likely to fall behind on their first mortgage. That is general research on PACE borrowers, not a statement about your household.

Clearing it means your housing cost is a mortgage plus the usual taxes and insurance, and mortgage insurance on top. The new loan is qualified on its own, since PACE is gone at closing. Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.

The Balanced Verdict

Neither path is better in every case. Paying inside the cash-out trades some of your proceeds for convenience and no upfront cash. Paying first keeps proceeds whole but demands money and some coordination. The deciding questions are simple: Do you have the cash? Do you need cash out? And how much equity does the payoff use up?

If you have no spare cash and need cash out, rolling the payoff in is the natural fit, as long as the payoff leaves enough room under the equity limit. When the payoff uses up a lot of that equity, a smaller cash-out or a different refinance may serve you better than either option as framed.

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 nothing here is a commitment to lend.

For your own numbers, request a scenario review with Lendmire.

For current guidelines and terms, see Lendmire’s FHA loan programs page.

About Lendmire

Lendmire, NMLS# 2371349, is a mortgage brokerage with consumer lending licenses in 16 states. FHA, VA, conventional and jumbo purchase and refinance loans are arranged through wholesale lending partners, and each application is reviewed individually by the lender. Scotsman Guide named Lendmire a Top Mortgage Workplace in both 2025 and 2026.

References

1. HUD Mortgagee Letter 2017-18

2. HousingWire

3. HUD Handbook 4000.1 Glossary

4. HUD Handbook 4000.1 servicing update

5. Freddie Mac Seller/Servicer Guide, energy retrofit programs

6. CFPB Residential PACE Financing