The Quick Read: The refinance pays your bills at closing when you list the debts on your application and the settlement agent sends payoff money straight to those creditors from the new loan. The old mortgage is paid first, then any other payees you designated, and whatever is left comes to you. This only works on a true cash-out refinance, and the amount available depends on your appraised value and the leverage cap.
Key Takeaways
- A conventional cash-out refinance replaces your current mortgage with a larger one. The difference funds payoffs, costs, and any cash to you.
- Paying a debt at closing can remove its payment from your qualifying ratios. That depends on the type of debt.
- The cap on a one-unit primary residence is 80% of appraised value, so you keep at least 20% equity.
- You have a three-business-day window after signing to cancel on a primary residence. Money moves after it ends.
- Debts paid with home equity become debts secured by your home.
What Does “Pays Your Bills at Closing” Actually Mean?
It means the closing agent, not you, sends the payoff money. Across the wholesale programs Lendmire places files with, a conventional cash-out refinance is one new first mortgage. It pays off the existing first mortgage, covers closing costs and prepaid items, and can retire other liens. Anything left over can go to the borrower.
Fannie Mae’s Selling Guide lists the acceptable uses of proceeds. They include paying the existing first mortgage (if it is at least 12 months old), financing closing costs and points, paying off subordinate liens of any age, and taking equity out for any purpose. The guide does not require cash to go to a particular bill. Paying credit cards or a car loan at closing is a choice built into your loan file, not a mandate.
Only a true cash-out can do this. A rate-and-term refinance allows only the existing first mortgage, closing costs and a purchase-money second, with just incidental cash back. If your goal is to retire other debts, you need the cash-out structure.
You can read more about cash-out refinance programs arranged through Lendmire’s wholesale lenders.
How Is the Loan Underwritten, Step by Step?
Underwriting runs in a fixed order. Each step sets a limit for the next one.
1. Application. You list the debts you want paid at closing. Say so up front. Lenders can build the payoffs into the loan and treat them correctly in your ratios.
2. Eligibility screen. The lender checks that at least one borrower has been on title for six months, and that the first mortgage being paid is at least 12 months old. Exceptions exist, such as delayed financing for homes bought with cash and inheritance.
3. Appraisal. A new appraisal sets the value. That value is the base for your leverage cap, so it limits how much can go to payoffs and cash combined.
4. Credit and ratio review. Most files run through automated underwriting, with a total ratio ceiling of 50% in the wholesale programs. Credit-score minimums start at a 620 decision score and rise with leverage. Manually underwritten loans use tighter ratios of 36% or 45%.
5. Debt treatment. The lender decides which of your payments still count after the payoffs. More on this below.
6. Disclosure, signing and funding. You receive a Loan Estimate and a Closing Disclosure, sign, wait out the cancellation window, and the lender funds.
Everything here is subject to lender guidelines and full file review. Nothing is a commitment to lend.
How Much Can You Borrow Against the Home?
On a one-unit principal residence, the conventional cap is 80% of appraised value. Two- to four-unit homes, second homes and investment properties are capped at 75%. Those caps come from the Fannie Mae Eligibility Matrix.
The practical result: after closing you must still hold at least 20% equity in a one-unit primary home. Payoffs, financed closing costs and cash to you all fit under that single ceiling. Pay off more debt, and less cash comes back.
One wholesale lane goes further. On a thirty-year fixed loan, primary residence, conforming balance, with a 680 score and a 50% ratio, it reaches 89.99% leverage with no mortgage insurance. It carries its own six months of seasoning. In Texas, a cash-out on the homestead is limited by the state constitution to the agency figure, and that wholesale lane is not written there. Terms depend on the lender’s guidelines, the property type, the leverage, and a full review of the credit profile.
Credit-score minimums rise as leverage rises, and they differ between automated and manual underwriting. The matrix has the exact cells. Reserves also apply to automated cash-out files when the total ratio is above 45%.
Which Debts Get Paid, and Which Must Be?
Most debts are your choice. A few are the lender’s call. Here is how the usual categories behave.
| Debt type | Your choice? | Effect on qualifying ratio |
|---|---|---|
| Existing first mortgage | Required in the structure | Replaced by new payment |
| Subordinate liens | Typically paid | Payment removed |
| Installment loans (auto, student, personal) | Usually your choice | Removed if more than ten payments remain |
| Credit cards | Your choice | Removed once paid to zero |
| Collections, judgments, liens | Often required by the lender | Cleared from the file |
The installment rule comes from the Fannie Mae guide on monthly debt obligations. An installment debt not secured by a financial asset counts when more than ten payments remain. One with fewer payments left can still count if it significantly affects your ability to meet your obligations. So paying off a loan that is nearly done does little for your ratio.
Revolving accounts are simpler. A card paid to zero at closing can stay open, and no payment has to be counted. Fannie Mae once required lenders to close these accounts and dropped that rule years ago. Keeping the card open is allowed. Whether it is wise is a separate question, covered below.
If this sounds like a qualifying shortcut, the details matter. Lendmire’s piece Conventional Cash-Out Refinance DTI Rules for Debts Paid at Closing goes deeper on that mechanic.
What Does the Money Flow Look Like?
Here is the order in which the money moves. It follows standard practice, and your Closing Disclosure shows the details.
| Order | Who acts | What you see on paper |
|---|---|---|
| 1. Old first mortgage | Settlement agent | Payoff line on the Closing Disclosure |
| 2. Other liens and designated debts | Settlement agent | Payoff lines listing each creditor |
| 3. Closing costs, prepaids | Settlement agent | Itemized cost sections |
| 4. Remaining cash | Settlement agent | Cash to you, if any |
Picture a borrower with a home at the 80% cap who owes on the first mortgage, two credit cards and a car loan. The new loan covers the mortgage first, then each card and the auto lender, then costs. If anything remains, it goes to the borrower. If the payoffs and costs use the whole amount, nothing comes back, and that is a normal outcome.
The reverse is also worth knowing. If the lender needs a debt gone to approve the file, it will often require the closing agent to pay it directly. You do not get to take the cash and promise to pay later.
Where Does the General Rule Break?
Several edge cases change the answer. These are the ones borrowers run into most.
The student loan cash-out feature. Fannie Mae waives the cash-out pricing adjustment when strict requirements are met. At least one student loan must be paid off in full with the proceeds, and cash back to you is capped at the lesser of 2% of the new loan or $2,000. Earlier announcements describe payment going directly to the servicer and a partial payoff not qualifying. Confirm the current terms in the Selling Guide before relying on this.
Delinquent property taxes. Taxes more than 60 days past due can be included in the new loan, with an escrow account set up, subject to applicable law.
Ineligible uses. Loans with a temporary interest buydown are not eligible for cash-out under Fannie Mae’s rule. Neither are proceeds used to pay off an installment land contract. Check the current guide, since these lists get updated.
PACE obligations. Freddie Mac requires a PACE obligation paid with cash-out proceeds to be paid in full under its cash-out rules.
LLC title. If an LLC you control holds title, time held by the LLC can count toward the six months. Title must move into your personal name for the loan to close.
Free-and-clear homes. A new mortgage on a home with no lien is generally treated as cash-out, not a plain refinance. Narrow exceptions exist.
Second homes and rentals. Occupancy decides leverage. The cap drops to 75% for second homes and investment property, and the cancellation right below generally covers only your principal dwelling.
Can You Cancel After Signing?
On a primary residence, yes, for three business days. The CFPB explains that the right of rescission covers most non-purchase-money mortgages. Cash and payoffs release after the window closes.
Three details trip people up:
- The clock starts after the last of three events: signing the note, receiving the Truth in Lending disclosure, and receiving two copies of the notice of the right to cancel. The CFPB’s explanation covers this.
- Saturdays count as business days. Sundays and legal public holidays do not.
- If you cancel, you still owe the original loan. Canceling the refinance does not erase the old one, and it does not change your duty to pay your other loans.
If the required notices were missing or wrong, the right can extend up to three years. Federal regulators have asked for public comment on possible changes to this right. That is a request for input, not a rule, so the existing right of rescission and its timelines are unchanged today.
What Are the Risks and Tradeoffs?
The biggest risk is that unsecured debt becomes debt secured by your home. A card balance can hurt your credit if unpaid. A mortgage balance can cost you the house.
A second risk is behavioral. Paying a card to zero and leaving it open is allowed, but a borrower who runs balances back up ends up with the old debt plus a larger mortgage. Some borrowers close accounts voluntarily for that reason.
Third, paying off a debt does not always lower your payment. It does only for debts counted in your ratios, and the new first mortgage is larger than the old one. Spreading a short-term debt across a long mortgage term can mean paying more total interest over time even if the monthly budget feels lighter.
Fourth, costs. Closing costs, points and prepaid items can be financed into the loan, which raises the balance. Cash-out also carries a loan-level price adjustment that varies by credit score and leverage, unless a feature like the student loan option waives it.
Finally, mortgage insurance. Standard conventional cash-out sits at or below 80% leverage, so insurance usually does not apply. The 89.99% wholesale lane exists specifically to avoid it. If you ever land above 80% on another structure, insurance can be cancelled at 80% of original value on request and ends automatically at 78%.
Tax treatment can depend on your situation; borrowers should speak with a qualified tax professional before relying on any deduction or credit.
Is This a Fit for You?
Use these questions as a test, not a threshold.
- Do you have at least 20% equity left after the payoffs, costs and any cash you want?
- Is the existing first mortgage at least 12 months old, and have you been on title for six months?
- Will the payoffs meaningfully reduce counted monthly obligations, or are they debts with only a few payments left?
- Can you keep the paid-off accounts from refilling?
- Would keeping your current loan and handling the debts another way cost less over time?
If the answers lean yes, the structure probably deserves a closer look. If you are retired and wonder how this plays with fixed income, see Lendmire’s article Do Debts Paid at Closing Count in a Retiree’s Cash-Out Refinance DTI?.
Pre-Closing Checklist
- Tell your loan officer at application which debts you want paid.
- Gather recent statements for each creditor.
- Expect payoff letters with per diem interest. Balances can move between the statement date and closing.
- Review each payoff line on the Closing Disclosure before signing.
- After the window ends and funding occurs, confirm each account shows a zero balance.
- Decide in advance what to do with the paid-off cards.
Key Terms Defined
Cash-out refinance: a new, larger first mortgage that pays off the old one and returns or redirects the extra equity.
Seasoning: the minimum time you must have owned the home or held the loan being paid off.
Payoff letter: a creditor’s statement of the exact amount needed to close an account on a given date.
Right of rescission: the three-business-day window to cancel certain loans on a primary residence.
Per diem interest: the daily interest that accrues on a balance until it is paid.
Frequently Asked Questions
Can a refinance pay my credit cards directly?
Yes, on a cash-out refinance. The settlement agent sends payoff funds from the new loan to each card issuer you designate. A rate-and-term refinance does not allow this beyond the existing first mortgage, closing costs and a purchase-money second.
Do I choose which debts get paid?
Mostly, though not entirely. Credit cards and installment loans are generally your decision. Lenders may require collections, judgments or liens to be paid as part of the file. Tell your loan officer early so the payoffs can be built correctly.
What if a payoff comes back different from my statement?
Expect small differences. Per diem interest and charges posting after the statement date change the figure. The Closing Disclosure shows the final amounts, and any difference lowers or raises the cash that would otherwise come to you.
Will paying debts at closing help me qualify?
It can, for debts counted in your ratios. An installment loan with more than ten payments left drops out once paid, and a card paid to zero drops out too. Debts with few payments remaining may not have counted anyway. Final treatment is up to the lender’s review.
Can I take cash instead of paying creditors?
Yes, in many cases. A cash-out refinance can return the extra equity to you, within the leverage cap. Some files require direct payoffs for certain debts, and the student loan feature caps cash back at a small amount.
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.
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.
For the program’s current guidelines, see conventional loan programs.
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References
1. Fannie Mae Selling Guide B2-1.3-03, Cash-Out Refinance Transactions
2. Fannie Mae Eligibility Matrix
3. Fannie Mae Selling Guide B3-6-05, Monthly Debt Obligations
5. CFPB: When the Rescission Period Starts
This article is part of Lendmire’s Conventional Loans series — every loan program’s qualification details, guidelines, and scenarios live on the loan options page.
Related reading: Bank vs Wholesale Lender for a Conventional Cash-Out Refinance · How to Apply for a Conventional Cash-Out Refinance Step by Step · Can You Cash Out Refinance a Vacation Home Under Conventional Rules?
Brandon Miller
Founder & CEO, Mortgage Loan Originator, Lendmire LLC
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Required disclosures. Lendmire (NMLS# 2371349) operates as a licensed mortgage broker, not a direct lender or depository. The discussion in this article is general in nature and should not be relied upon as financial, legal, or tax advice — every investment scenario is unique and should be reviewed by a qualified professional. Any loan inquiry is subject to lender underwriting, and this article is not a commitment to lend or a guarantee of approval. Mortgage rates, loan terms, and program guidelines vary by borrower, property, and state, and may change without notice. Equal Housing Opportunity. Verify licensure at NMLS Consumer Access.