Can You Pay Off a PACE Lien With an FHA Cash-Out Refinance?

The Quick Read: Yes, when your home has enough equity. FHA treats a PACE obligation as existing debt, and a cash-out refinance is an allowed way to retire it. FHA will not insure a new loan on a home that keeps the PACE lien in place, so the payoff happens at closing out of the new loan. The real question is whether your equity and your FHA qualification can cover the payoff.

PACE stands for Property Assessed Clean Energy. It is financing for things like solar panels or efficiency upgrades, repaid through your property tax bill. The lien sits ahead of your mortgage, and that placement is what makes FHA treat it so strictly.

Here is how the mechanics work, where the plan breaks down, and what to do when it does.

What Does FHA Actually Say About PACE?

FHA bars a PACE lien from staying on the property, but it allows the lien to be paid off with a refinance. HUD Mortgagee Letter 2017-18 made properties that will remain encumbered by PACE ineligible for FHA-insured forward mortgages. The same letter calls PACE existing debt and keeps the policy that lets a cash-out refinance pay it off. It applies to one-to-four unit homes. The policy took effect with FHA case numbers assigned in early January 2018.

The path has a short history. HUD briefly allowed FHA loans on PACE homes, then reversed course. Its reasoning, as reported at the time, was that PACE takes a first-lien position ahead of the FHA mortgage. That puts the insurance fund and your ability to refinance or sell at risk. Confirm the current wording with your lender, since program guidelines can change.

One myth is worth clearing up. “FHA won’t touch a home with PACE” is wrong. FHA won’t leave PACE in place. It will pay it off.

How Does the Payoff Work at Closing?

The PACE payoff comes out of your new loan proceeds, and the lien must be satisfied at closing. Nothing gets paid to you until the PACE administrator is paid.

The sequence looks like this:

1. Identify the obligation. A PACE assessment can show up on your property tax bill, in a title search, or through energy-related improvements the appraiser spots.

2. Get a payoff statement. The closing agent requests it from the PACE administrator. Payoff quotes expire, so a stale figure is a common snag.

3. Appraisal. The appraiser reports the outstanding PACE amount, per the handbook attachment to the same HUD letter. The appraiser also analyzes how the PACE-funded improvements affect value once the assessment is gone. The lender cannot credit the solar panels at what they cost.

4. Payoff at closing. Proceeds go to the administrator, and the lien is released.

5. Confirm the release. Make sure the release is recorded, then check that the assessment is gone from your next tax bill.

Because the PACE amount comes out of proceeds, the new loan has to be big enough to cover it. That makes it larger than a refinance without a PACE lien. You are moving a cost off your tax bill and into your mortgage.

What Decides Whether It Works?

Three things decide the outcome: your equity, the appraisal, and your ordinary FHA qualification.

Equity. Across the wholesale programs I place FHA files with, a cash-out refinance reaches 80% of the home’s value. It requires that you have owned and lived in the home for 12 months before the case number. Your existing mortgage and the PACE payoff both have to fit under that 80% ceiling, with room left for closing costs. If they don’t, the cash-out route closes.

Appraisal. The value that counts is the value with the PACE assessment extinguished. Solar panels that were financed at full price don’t always add that much to an appraisal. That can shrink your usable equity.

Qualification. The PACE payoff doesn’t exempt you from anything. FHA cash-out is a full-file loan. A decision score of 580 or higher is where the wholesale programs I work with start. Debt ratios begin at 31/43, meaning housing costs and total debts as percentages of income. Documented compensating factors can stretch them to 40/50 at the top tier. Most files are decided by the automated underwriting finding. All of this is subject to lender guidelines and full file review.

Two costs are built into the loan. FHA charges an upfront mortgage insurance premium, usually financed into the loan. It also charges an annual premium that varies with term, loan amount and LTV. On a thirty-year loan above 90% LTV, the annual premium lasts the whole term. On a cash-out capped at 80%, that is not your situation. At or below 90%, it ends after eleven years. County loan limits also apply to the amount you can borrow. Confirm current premium schedules and limits with your loan officer or a qualified local professional.

If you want the full program picture, Lendmire’s FHA cash-out refinance program page lays out how the equity side works.

Why Does PACE Matter So Much to a Lender?

PACE sits ahead of your first mortgage in a foreclosure, and it tends to cost borrowers more than they expect. The CFPB found that PACE substantially raised borrowers’ property taxes. It also found that PACE borrowers were more likely to fall behind on their first mortgage. On average, PACE loans cost noticeably more than first mortgages.

That is the lender’s worry in one paragraph. A higher tax burden and a lien that ranks first both raise risk. For you, the same facts can make payoff attractive. Retiring PACE moves an obligation off your tax bill. In its place comes a mortgage payment, which is often on lower-cost terms than the average PACE loan, though your own PACE contract may differ and your new payment will be larger. Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.

Cash-Out or Rate-and-Term: Which Fits?

Both can retire a PACE lien. FHA’s policy allows payoff through a rate-and-term refinance as well as a cash-out, and the cash-out policy stayed unchanged. The difference is what else the loan does.

Rate-and-term reaches higher leverage than cash-out. So if your only goal is to clear the PACE lien and you do not need cash, rate-and-term may fit more homeowners. Here is a genuine toss-up: if you have room under 80% and also want to consolidate other debt, cash-out does both jobs in one loan. If you are tight on equity, the higher-leverage rate-and-term can be the only version that works.

What If You Don’t Have Enough Equity?

Then the FHA path closes. Because FHA won’t let PACE stay in place, a shortfall can’t be waived. Your options are limited, so know them before you apply.

• Pay down the PACE balance first, with savings, so the payoff fits inside the loan.
• Wait and build equity, either through payments or a value increase.
• Look at conventional. Fannie Mae’s Selling Guide lets a lender leave a PACE loan in place on a limited cash-out refinance in certain cases. That is a conventional rule, not an FHA option, and other conditions apply.
• Reverse mortgage. An FHA-insured reverse mortgage (HECM) can also pay PACE at closing, but not if the lien stays.

Selling is another route, and PACE doesn’t vanish when you sell. It stays with the property, and a buyer or the buyer’s lender may require payoff as a condition of sale. A sale needs the same payoff step.

Common Mistakes

• Relying on an old payoff number. Payoff figures carry a good-through date. Ask for a fresh statement close to closing.
• Paying the wrong office. The PACE administrator, not the county tax collector, usually handles the payoff.
• Skipping the release check. Confirm the recorded release and your next tax bill.
• Assuming the solar panels add full value. The appraisal analysis may not credit what you paid.
• Planning the cash-out before the payoff. The PACE payoff comes first. What’s left is your cash.

Key Terms Defined

PACE (Property Assessed Clean Energy): Financing for energy or efficiency upgrades that you repay through your property tax bill.

Lien: A legal claim on your home that must be paid before you can sell or refinance cleanly.

Cash-out refinance: A new, larger mortgage that pays off your old loan and any other debts, and returns the leftover as cash.

LTV (loan-to-value): Your loan balance as a percentage of the home’s appraised value.

Mortgage insurance premium: FHA’s built-in insurance charge, paid upfront and annually.

Payoff statement: A written figure from the PACE administrator showing what you owe through a stated date.

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. All figures here are 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.

References

1. HUD Mortgagee Letter 2017-18

2. HUD Mortgagee Letter 2017-18 handbook attachment

3. CFPB press release on the PACE final rule

4. Fannie Mae Selling Guide B5-3.4-01