The Quick Read: Fold in the debts that cost more than the new mortgage and still have a long time left to run. Leave out cheap, nearly finished, or protected debts. A cash-out refinance doesn’t blend your debts. It pays them off with a bigger mortgage, so the real question for each debt is whether it belongs on a loan secured by your home.
Key takeaways
- Paying off cards, personal loans or auto loans makes the refinance a full cash-out, not a limited one.
- Fold in expensive debts with a long remaining term. Skip low-cost debts and ones with a few payments left.
- A lower monthly payment can come from a longer term, which can mean more total interest.
- Moving unsecured debt onto your mortgage puts your home behind it.
- The appraisal and the leverage cap set how much room you have for payoffs.
What Does “One Payment” Actually Mean?
The new mortgage pays off your old mortgage and each debt you choose, then leaves you with a single loan. The old debts are not merged. They are closed out at settlement with money from the new loan.
That distinction matters because the new loan is secured by your home. A credit card is not. Consolidating doesn’t erase the debt; it moves it into a loan secured by the home.
Borrowers get the most out of this when they treat it as a selection exercise, not a sweep. Lendmire’s cash-out refinance programs are built around that idea: choose the debts deliberately, then size the loan to fit.
Why Paying Off Debt Changes the Loan Type
A limited cash-out refinance, often called rate-and-term, pays off the existing first mortgage and closing costs. Only a second lien used to buy the property can be paid off with it. Fannie Mae’s limited cash-out rules leave no room for cards or personal loans. Cash back is held to a small amount, the lesser of 1% of the new balance or $2,000.
Once you pay off consumer debt, the file becomes a cash-out refinance. That changes the leverage available. On the conventional side, the cash-out lane reaches 80% of value on a one-unit primary home and 75% on two- to four-unit homes, second homes and investment property. A limited refinance can go to 95% on a one-unit primary home. If you own a rental or second home, occupancy decides the leverage, so the property’s use will shape how much you can borrow.
How the Loan Is Underwritten, Step by Step
1. Inventory every debt. List the balance, monthly payment, remaining payments and interest cost for each one.
2. Check what leaves your ratios. Under Fannie Mae’s debt-to-income rules, installment debt with more than ten payments left counts in full. Shorter ones count only if they strain your finances. Paid-off debts drop out of the monthly obligations.
3. Look at why you’re paying them off. Fannie Mae says paying off debt only to qualify must be evaluated carefully, and your credit-use history is a factor.
4. Confirm eligibility. The first mortgage being paid off must be at least 12 months old, counted note date to note date. Fannie Mae’s cash-out rules don’t apply that 12-month test to subordinate liens you’re paying off. Freddie Mac requires at least one borrower on title for six months, with exceptions such as inheritance, and all borrowers must live in a primary home.
5. Get the appraisal. Value times the leverage cap, minus the old mortgage payoff, minus financed costs, equals the room left for debts.
6. Close with direct payoffs. The lender documents each payoff and sizes the loan to include them. Whatever room remains is yours.
Any equity you keep outside the loan matters too. A HELOC or second that stays on the home counts toward combined leverage.
The Five-Question Test for Each Debt
Run every debt through these questions. Two or more “think twice” answers usually means leave it out.
| Question | Fold in | Think twice |
|---|---|---|
| Is its cost well above the new loan’s? | Yes, by a wide gap | Close to the same or lower |
| How long is left? | Many years | A handful of payments |
| Is the balance meaningful? | Large enough to matter | Small |
| What protections would you lose? | None worth keeping | Federal repayment options |
| Is it friction to pay off? | Simple payoff | Co-signers, liens, disputes |
The logic follows the CFPB’s framing: using home equity to pay other debts can make sense when the cost of extracting the cash is lower than the cost of carrying those debts. Extraction cost means new-loan interest plus fees.
Debt by Debt: What Usually Belongs
Credit cards. Strong candidates when balances are large and carried month to month. The tradeoff is that unsecured debt becomes secured. If the balance grew because spending outran income, the CFPB notes consolidation probably won’t help unless spending falls or income rises. Verdict: fold in, with a plan for the old accounts.
Personal loans. Often costly and short-dated. If a lot of term remains, they’re good candidates. If they’re close to done, skip.
Auto loans. Here is the term mismatch. A car loan with a few years left, stretched across a 30-year mortgage, can cost more in total interest even when the monthly payment drops. Verdict: usually leave out, unless the car loan is unusually costly with a long way to go.
Student loans. Fannie Mae offers a student loan cash-out option with a waiver of its cash-out pricing adjustment when conditions are met. Federal loans carry repayment options and protections that vanish once the balance is paid off with mortgage money. Private student loans lack those protections, so they’re easier to fold in. Verdict: federal loans, think hard; private loans, case by case.
Medical debt. Often interest-free or negotiable. Paying it with a secured loan can turn a flexible obligation into a rigid one. Verdict: usually leave out.
HELOC or second mortgage. These count against your combined leverage if they stay. Folding them in frees room and leaves one lien. Verdict: often a good fit, especially if the second carries a high cost.
Co-signed, business or tax debts. These carry special handling. Federal tax installment agreements that don’t meet Fannie Mae’s exclusion conditions must be paid in full. Debts in a spouse’s name or a business’s name need a conversation with your loan officer before they go on any list.
Debts to Leave Out, and Why
Three kinds of debt usually stay out:
- Nearly paid off. They add years and interest for little gain.
- Cheap. If the debt costs less than the new loan, folding it in raises your cost.
- Protected. Loans with built-in flexibility, such as federal student loans, lose that when they’re paid off.
Also consider the first mortgage itself. A cash-out refinance replaces your whole first mortgage, so new terms apply to the entire balance. If your current first mortgage is cheaper than anything available now, replacing it is a real cost. Lendmire’s piece Keeping the First Lien vs Rolling Both Into One Cash-Out Refinance works through that choice.
A Mixed Household, Run Through the Test
Picture a homeowner with a large credit card balance, a personal loan with many payments left, a car loan with two years to go, a federal student loan, and a HELOC.
- Credit card: fold in. High cost, large balance.
- Personal loan: fold in. Long term remaining.
- HELOC: fold in. It frees combined-leverage room and removes a lien.
- Car loan: leave out. Two years of payments would stretch to 30.
- Federal student loan: leave out. Its borrower protections are worth keeping.
The result is one mortgage payment plus two small ones that end on their own schedule. The household’s monthly obligations fall without the term stretch on everything.
Will It All Fit?
Add up the payoffs and the closing costs, then compare to the room your equity leaves. Closing costs can be rolled into the loan, but only if enough room remains to pay off the debts you meant to consolidate. The CFPB notes closing costs can run to hundreds or thousands of dollars.
If the list doesn’t fit, trim in this order: low-cost debts first, then nearly paid-off ones, then protected ones. Keep the most expensive debt on the list longest.
Above 80% leverage, mortgage insurance applies. It can be cancelled at 80% of the original value on request, and the servicer must end it at 78%. Cash-out on a conventional loan stops at 80%, with one wholesale lane reaching 89.99% with no mortgage insurance for borrowers with a 680 score and a 50% ratio on a thirty-year fixed primary home at a conforming balance. That lane carries its own six months of seasoning. In Texas, the state constitution caps homestead cash-out at the agency figure, and that wholesale lane isn’t written there. All of it is subject to lender guidelines and full file review.
Risks and Tradeoffs
- Secured debt. Converting card or loan debt to mortgage debt raises foreclosure risk if payments become unsustainable. Default on an unsecured debt is unlikely to cost you the home.
- Longer term. Cash-out loans are usually repaid over 30 years, and a lower payment can come only from that longer term.
- Less equity. Lenders typically require you to keep some equity, and what you use for debts won’t be there for repairs or emergencies.
- Re-borrowing. Paying off cards and then running them up again leaves you with the mortgage and new balances.
Alternatives Compared
| Option | First mortgage | Best when |
|---|---|---|
| Cash-out refinance | Replaced | Your current first loan is costly |
| HELOC or home equity loan | Stays in place | Your first loan is cheap |
| Unsecured consolidation loan | Untouched | Debt is modest and equity is thin |
| Do nothing | Untouched | Debts are cheap or nearly done |
If you already hold an FHA or VA loan, the FHA Streamline and VA IRRRL can’t consolidate debt. They are no-cash-out programs aimed at lowering your existing loan’s cost, so the cash-out path or a second lien is the route for debt payoffs. A homeowner using a cash-out to fund a rental down payment is in a different situation; Lendmire’s note on funding the next down payment from one property covers it separately from this one.
Your Pre-Application Checklist
1. Pull a balance, payment, remaining term and cost for every debt.
2. Mark each as fold in, think twice, or leave out using the test above.
3. Note any co-signed, business, tax or secured debts for a loan officer.
4. Gather your current mortgage statement and homeowners information.
5. Decide how you’ll handle old accounts once they’re paid.
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
Cash-out refinance: a new mortgage larger than your old one, with the difference paid to you or to creditors.
Limited cash-out refinance: a refinance that pays off the first mortgage and closing costs with only small cash back.
Seasoning: the time you’ve held a loan or title before a refinance is allowed.
Combined leverage: all liens on the home divided by its appraised value.
Debt-to-income ratio: your monthly debt payments divided by your monthly income.
Frequently Asked Questions
Which debt should I pay off first?
The costliest one with the most time left, usually a large card balance or a personal loan. Debts that cost less than the new mortgage, or that end soon, usually come last or stay out.
Can I include my car loan?
Yes, if the file allows it, but it’s often a poor fit. A loan with a few years left would stretch across a long mortgage term, which can raise total interest even as the payment falls.
Should I include student loans?
Private ones, often. Federal ones deserve caution, since paying them with mortgage money ends repayment options and protections that come with federal loans.
What if the cash isn’t enough?
Trim the list. Drop low-cost and nearly finished debts first, and keep the most expensive debt in. Rolling in closing costs shrinks what’s left, so check that math before you commit.
Does paying off debts change how I qualify?
Yes, it can. Paid-off installment debt may leave your monthly obligations, though Fannie Mae asks lenders to weigh whether you’re paying debts off only to qualify. Everything is subject to lender guidelines and a full file review.
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 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. CFPB: Cash-Out Refinances and Paydown Behavior of Non-Mortgage Debt Balances
2. Fannie Mae Selling Guide B2-1.3-02: Limited Cash-Out Refinance Transactions
3. Fannie Mae Announcement SEL-2025-08
4. Fannie Mae’s debt-to-income rules
5. Fannie Mae Selling Guide B3-6-07
6. Fannie Mae Selling Guide B2-1.3-03: Cash-Out Refinance Transactions
7. Freddie Mac Guide Section 4301.5
8. CFPB Ask CFPB: consolidating credit card debt
9. Fannie Mae Selling Guide B3-6-05
10. HELOC or home equity loan leaves the first lien in place
11. CFPB Using Home Equity guide
This article is part of Lendmire’s Refinance series — every loan program’s qualification details, guidelines, and scenarios live on the loan options page.
Related reading: How to Shorten a Cash-Out Refinance on a Texas Homestead · Can Cash-Out Refinance Proceeds Be Used for a Second Home Down Payment? · Cash-Out Refinance Criteria for a Lock-in Homeowner
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
Disclosure information. Lendmire is a state-licensed mortgage brokerage under NMLS# 2371349. Lendmire is not a depository institution, direct lender, or financial advisor — all loans referenced are placed through wholesale lender partners and are subject to each lender's underwriting standards. This article is provided for general informational purposes and is not a commitment to lend, nor does it constitute financial, legal, or tax advice. Loan programs, terms, rates, and qualification standards change without notice and depend on borrower profile, property type, and the state in which the subject property is located. Equal Housing Opportunity provider. NMLS Consumer Access: nmlsconsumeraccess.org.