The Quick Read: A private note gets paid off at closing when a new cash-out mortgage on your home funds the payoff and the title company sends that money straight to the noteholder. The label “private note” decides nothing on its own. What matters is whether the note is recorded against your home, whether it paid for the home, and whether your equity can cover it. Everything stays subject to lender guidelines and full file review.
If you owe money to a relative, a former seller, or a private lender, you probably want one clean payment instead of two. A cash-out refinance can do that. Here is how it works, step by step, and where it stops working.
What Does “Retiring a Private Note” Actually Mean?
Retiring a note means paying it off in full and getting the lien removed from your home. A private note is simply a debt owed to a person or small lender instead of a bank. It might be a seller-carry loan from when you bought, a loan from a family member, or money from a private lender.
Three setups cover most cases:
- A recorded lien. The note is secured by a deed of trust or mortgage filed against your home.
- An unsecured note. You owe the money, but nothing is recorded against the property.
- A contract for deed. The seller still holds title while you make payments.
Each gets treated a little differently. Sorting out which one you have is the first job, and it drives every later step.
Why Cash-Out and Not Rate-and-Term?
Most private notes need a cash-out refinance. Here is the distinction.
A refinance, which the industry also calls a limited cash-out refinance, replaces your first mortgage. It can also pay off a second lien, but only one that was used to buy the home. Across the wholesale programs we arrange files with, that limited lane reaches 95% loan-to-value on a one-unit primary residence. Loan-to-value (LTV) is the loan amount divided by the home’s appraised value.
A cash-out refinance has no limits on what the money does. It can pay off any debt secured by the home, and it can put cash in your pocket. The tradeoff is lower leverage. Conventional cash-out tops out at 80% LTV on a one-unit primary residence, and 75% on two- to four-unit primary residences, second homes, and investment property. Leverage, reserves, and pricing vary by lender and program; the final terms follow the full file review.
Why does a private note usually land in the cash-out box? Fannie Mae’s rule on limited cash-out refinances requires documentation that the whole subordinate lien funded part of the purchase price. A note that paid for a remodel, a business, or old debts fails that test. So does a note that was only partly used for the purchase. Fail by a dollar, and the loan is cash-out.
Fannie Mae’s cash-out guideline is friendlier on the note itself. It lets a cash-out loan pay off subordinate liens of any age. So a note you took out last month can be retired. The age limit applies elsewhere, as you’ll see below.
You can read more about how Lendmire arranges cash-out refinance programs through wholesale lenders.
How Does the Payoff Work, Step by Step?
Think of it as a relay. You hand off documents, the lender sets a loan amount, and the title company moves the money.
1. Classify the note. Is it recorded? Did all of it buy the home? Is it a contract for deed? Your answers decide which loan category applies.
2. Collect the note file. Gather the signed note, the recorded deed of trust or mortgage, any modifications, and a payoff statement from the noteholder. If you claim the note was purchase-money, add the original settlement statement.
3. Order the appraisal. Freddie Mac’s cash-out product calls for a new appraisal and inspection report. The appraised value sets your maximum loan. It decides whether the note fits.
4. Underwrite the new loan. The lender checks credit, income, debt ratios, and reserves. The new payment replaces your old mortgage payment and the note payment.
5. Close. You receive a Closing Disclosure, the form that lists your final loan terms and costs. The title company pays the noteholder directly from the loan proceeds.
6. Wait out the cancellation window. A refinance on your home usually carries a right to cancel. More on that below.
7. Confirm the release. After payoff, the noteholder must record a release or satisfaction of the lien. Ask your title company to confirm it was recorded. Also ask for the original note back, marked paid.
Your money never needs to touch your bank account for the payoff. It flows from the new lender to title to the noteholder.
The Payoff Waterfall: Where the New Loan’s Money Goes
“Cash-out” does not promise cash. It means the loan is allowed to exceed what you owe. Whether you actually get cash depends on the math.
Picture the new loan as a bucket filling from the top down:
- First, the payoff of your existing first mortgage.
- Second, the payoff of the private note, including interest accrued through the funding date. That daily interest is called per diem, and the noteholder’s payoff statement spells it out.
- Third, your closing costs and any prepaid items.
- Last, whatever is left comes to you as cash.
If the bucket runs dry before the last item, there is no cash back. If it runs dry before the note is covered, the deal does not close as planned. The appraisal sets the size of the bucket.
Run it in index units. Say your home appraises at 100 units. At 80% LTV, the largest new loan is 80 units. If your first mortgage is 50 units, your note is 20 units, and closing costs run 3 units, then 73 units go out the door and 7 units come back to you. Raise the note to 27 units and nothing comes back. Raise it to 30 and you’re short. Those are modeled numbers for the logic, not a quote. Terms vary by lender guidelines, property type, leverage, credit profile, and full file review.
Two Tests That Cap Your Loan
Two things limit how big the new loan can be. Know which one binds you.
Equity. The LTV ceiling for your property and occupancy is the first test. This is the one most borrowers hit.
Income and credit. A bigger loan means a bigger payment. The lender checks your debts against your income. Across the wholesale conventional programs we place files with, the automated finding governs most files, with a total ratio ceiling of 50%. Manually underwritten loans use 36% or 45%, along with the reserve and score factors in the Fannie Mae Eligibility Matrix. Pricing and available terms vary by lender, borrower profile, property type, and full underwriting review. Credit events carry waiting periods set by the agencies: four years from a chapter 7 discharge, seven from a foreclosure, and four from a short sale or deed-in-lieu, shorter with documented extenuating circumstances.
If your equity is fine but your ratio is too high, shrinking the note first, or paying it down from savings, may fix it.
One more figure matters here. Above 80% LTV, mortgage insurance applies. On a cash-out at 80%, you won’t have it. One wholesale 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 carries its own six months of seasoning. In Texas, a cash-out on the homestead is capped by the state constitution, and that wholesale lane is not written there. Exact terms depend on the lender’s guidelines, property type, leverage, and a full review of the borrower’s file.
Seasoning: The Waiting Rules That Trip People Up
Seasoning is the time you must hold something before refinancing it. Two clocks matter for a cash-out.
- The first mortgage must be at least 12 months old, measured note date to note date. This is the loan being paid off, not the private note. Freddie Mac’s 12-month rule has exceptions, including special purpose cash-out loans and a first lien that is a HELOC.
- A borrower must be on title for 6 months. Freddie Mac’s cash-out guide uses that six-month title rule, with exceptions for inheritance and legal awards such as divorce. Delayed financing is another exception.
Notice what is missing: a seasoning rule for the private note itself. A recent family loan can be paid off. A freshly bought home often can’t be refinanced yet.
Edge Cases Where the General Rule Breaks
Real files rarely match the textbook. These are the situations that change the answer.
An unsecured note. With no lien of record, there is nothing to “pay off” in the title sense. The debt is typically settled as a use of the cash-out money. Some lenders may ask for proof of the debt, such as the signed note and payoff statement. Treat this as case-by-case and confirm with your loan officer.
A purchase-money seller note. If the entire note funded your purchase, it can fit the limited cash-out lane with full documentation. If only part of it did, the transaction is treated as cash-out.
A contract for deed. Fannie Mae’s installment land contract rule turns on a 12-month line. If the contract was signed within 12 months of your application, the new loan is purchase-money. If it is older, the new loan is a limited cash-out refinance. Cash-out refinances involving these contracts are not eligible for delivery to Fannie Mae. If you want cash on top of the payoff, this structure blocks it.
A free-and-clear home. A new mortgage on a home with no mortgage is a cash-out refinance, and the six-month title rule applies.
Buying out a co-owner. Special purpose cash-out rules apply, per Freddie Mac’s guide on special purpose refinances.
Occupancy. Freddie Mac requires all borrowers on a primary-residence cash-out to occupy the home. If the property is a second home or a rental, occupancy decides the leverage. Cash-out on those tops out at 75% LTV on two- to four-unit homes, second homes, and investment property. Every figure here varies by lender and program — guidelines, property type, leverage, and credit profile all apply.
Government loans. An FHA Streamline or VA IRRRL cannot retire a private note. The Streamline only refinances an existing FHA loan and does not pay off outside debt. The IRRRL only refinances an existing VA loan. A note payoff on a government loan needs a cash-out version, which carries lower leverage than a streamline. The VA cash-out is the route that can pay other liens, and it requires a net tangible benefit when moving a non-VA loan into a VA loan, per VA’s cash-out refinance guide.
Down payment assistance seconds. Fannie Mae’s matrix does not permit Community Seconds with cash-out refinances, so that route is closed.
Disaster repairs. In FEMA-designated areas, Fannie Mae’s disaster flexibilities allow refinancing certain non-purchase-money subordinate loans used for repairs. The subordinate loan must post-date the disaster.
What If the Numbers Fall Short?
Say the appraisal comes in low, and the loan can’t cover the payoff. You have four moves.
| Option | Choose this when |
|---|---|
| Bring cash to closing | You have savings and want the loan to clear the note |
| Pay off only part of the note | The noteholder agrees to keep a smaller balance |
| Extend the note | The holder is willing and your equity may grow |
| Sell the home | Equity is thin and the note is due |
Leaving a note in place is possible only if it is clearly subordinate to the new mortgage. That usually means the noteholder signs a subordination agreement. Not every holder will.
Your Options at Maturity, Compared
If the note is due soon, a cash-out is one of several exits. Here is how they stack up.
| Exit | Best when | Watch out for |
|---|---|---|
| Cash-out refinance | You have equity, credit, and income | Lower leverage, added pricing adjustments |
| Extend with the holder | The holder is flexible | Holder can say no |
| HELOC | You want a flexible second lien | Another lien and a variable structure |
| Pay from savings | You have the cash | Draining reserves |
| Sell | Equity or income falls short | Giving up the home |
Lendmire’s piece Cash-Out Refinance vs HELOC for Paying Off a Private Note That Is Due goes deeper on the HELOC trade.
What Changes for Your Budget
One payment replaces two or more. That feels like relief. Here’s the catch: the note balance now sits inside a long-term loan, so the total interest you pay over the term can rise even when the monthly payment falls. Run that tradeoff before you sign.
Cash-out loans also carry pricing adjustments that limited cash-out loans don’t, based on score and LTV. Those costs show up on your Loan Estimate, so compare it line by line. And the note’s old payment schedule disappears, replaced by the new loan’s term. That can help or hurt.
Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
The Three-Day Cancel Right and Your Payoff
Most refinances on a primary home carry a three-business-day right to cancel, according to the CFPB. If you cancel, the refinance is undone, but you still owe the original loan. Cash and the note payoff typically are not disbursed until that window passes. So the noteholder’s payoff date should account for it. Ask for a payoff figure that stays good through the funding date, with per diem noted.
Common Misconceptions
- “Paying off a second lien is always limited cash-out.” Only when the whole lien funded your purchase.
- “The note must be 12 months old.” The 12 months applies to your first mortgage, not the note.
- “A Streamline or IRRRL can fold in the note.” Neither can.
- “I can cancel and keep the cash.” You still owe the original loan.
- “A land contract can be cashed out.” Not for delivery to Fannie Mae.
- “Limited cash-out is a fixed small cash-back cap.” That cap has changed. Ask your loan officer for the current figure.
Checklist Before You Apply
- Payoff statement from the noteholder, with per diem.
- Signed note and recorded lien documents.
- Any modifications or side agreements.
- Original settlement statement if the note funded your purchase.
- Proof of when you took title.
- Your first mortgage statement.
- Recent income and asset records.
Gaps here cause the most stalled files. Many are fixable. A missing release from a noteholder who has gone silent is harder to fix than a missing pay stub.
Key Terms Defined
Cash-out refinance: a new mortgage larger than what you owe, with the extra used to pay other debts or sent to you as cash.
Limited cash-out (rate-and-term) refinance: a refinance that replaces your first mortgage and only a purchase-money second lien, with minimal cash back.
Per diem: the daily interest that keeps accruing on a debt until it is paid.
Seasoning: the time you must hold a loan or title before refinancing it.
Subordination: a written agreement that moves an existing lien behind the new mortgage in priority.
Loan-to-value (LTV): the loan amount divided by the home’s appraised value.
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. Lendmire’s piece How to Pay Off a Maturing Private Note With a Rental Cash-Out Refinance shows the timeline from the maturity date backward.
Frequently Asked Questions
Do I need the noteholder’s permission to refinance?
Usually not for the payoff itself. The holder is owed the balance and must release the lien once paid. You do need their cooperation for a payoff statement and the release. If you want the note to stay in place, you need their written subordination.
Does the payoff money pass through my account?
No. The title company sends the payoff straight to the noteholder from the loan proceeds. Any leftover cash comes to you after closing and after the cancellation window ends.
Can I retire a private note on an unrecorded loan from a relative?
Often yes, as a use of cash-out funds, since there is no lien to release. Some lenders ask for the signed note and a payoff letter.
What if my home is a second home or rental?
Occupancy decides the leverage. Cash-out on a second home, investment property, or a two- to four-unit property tops out at 75% LTV on the programs described here. Final terms depend on lender guidelines, property type, leverage, and the borrower’s complete credit picture.
Is the cash I take out taxable?
Generally, loan proceeds from a cash-out refinance are treated as borrowed money rather than income, so the cash itself is typically not taxed as income. How the funds are used and how the interest is treated can vary by situation, so a tax professional should confirm the details for your circumstances. For your own numbers, request a scenario review with Lendmire.
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.
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References
1. Fannie Mae Selling Guide B2-1.3-02: Limited Cash-Out Refinance Transactions
2. Fannie Mae Selling Guide B2-1.3-03: Cash-Out Refinance Transactions
3. Freddie Mac’s cash-out product
4. Freddie Mac’s 12-month rule
5. Freddie Mac Guide §4301.5: Cash-Out Refinance
6. Fannie Mae Selling Guide B2-1.3-05: Payoff of Installment Land Contract
7. Freddie Mac’s guide on special purpose refinances
8. VA’s cash-out refinance guide
9. Fannie Mae’s disaster flexibilities
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: Cash Out Refinance Duplex · Should a Homeowner Use a Cash-Out Refinance for a Renovation? · Should a Homeowner Take the Maximum Cash on a Cash-Out Refinance?
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
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- 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.