Mortgage  Question?
Can You Use a Cash Out Refinance to Pay Off Charge Off?

Can you use a cash out refinance to pay off charged off debt?

Harry Jensen
By , Trusted Mortgage Expert with 45+ Years of Experience
Edited by Michael Jensen

The short answer to your question is that you can use the proceeds from a cash out refinance for just about anything, including to pay off charged off debt. Simply put, although lenders want to understand how you intend to use the proceeds, they put few, if any, restrictions on how you spend the funds.

The key points to keep in mind for a cash out refinance are that you need to have enough equity in your home and you need to be able to afford your new monthly mortgage payment. The maximum loan-to-value (LTV) ratio for a cash out refinance of a single unit property such as a home or condominium is typically 80%, which means you can access 80% of the fair market value of your property when you refinance.

For example, if your home is valued at $100,000, the maximum mortgage you are eligible for is $80,000 ($100,000 (property value) * 80% (LTV ratio) = $80,000 (loan amount)). You are required to pay off the existing mortgage and other loans secured by the property before you receive any proceeds for the loan. Closing costs, which can run thousands of dollars depending on your mortgage amount and program, are also deducted from your loan proceeds.

You receive any proceeds that remain after you pay off your current mortgage balance and pay for closing costs. You usually have significant flexibility to spend the funds how you want.

Use ourCASH OUT REFINANCE CALCULATORto determine the proceeds you can take out of your home

You can use the money for any number of purposes including to renovate your home, travel, pay college tuition and pay off or down debt. In some cases, the lender may require you to pay off and close certain accounts, such as credit cards, as a condition to you qualifying for the refinance. Lenders apply this requirement if your monthly debt expenses are too high to afford your new monthly mortgage payment as well as your other debt expenses.

This can be a potential issue because the mortgage rate for a cash out refinance is typically higher than for a regular refinance when you receive no proceeds from the loan, which is also called a rate and term refinance. Paying a higher rate increases your monthly payment and can make it more challenging to qualify for the mortgage.

The table below shows refinance rates and fees for leading lenders. We recommend that you contact multiple lenders to find the best mortgage terms. Shopping lenders is the best way to save money on your refinance.

Current Refinance Mortgage Rates in Ashburn, Virginia as of July 19, 2024
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Rate data provided by Displayed by ICB, a division of Mortgage Research Center, NMLS #1907, Equal Housing Opportunity. Payments do not include taxes, insurance premiums or private mortgage insurance if applicable. Actual payments will be greater with taxes and insurance included. Read through our lender table disclaimer for more information on rates and product details.

Returning to your specific question, you can also use the proceeds to pay off debt that has been charged off although this would be somewhat unusual because the creditor has already written off that debt.

Although a charge off affects your credit score, in most cases you do not need to pay it off to qualify for a refinance on your primary residence. Additionally, because you typically do not make payments on charged off debt, it also does not affect your debt-to-income ratio and the mortgage amount you can qualify for.

Another option to consider is to pay off the charge off over time without refinancing your current mortgage. This approach may enable you to resolve this credit issue without incurring the costs associated with refinancing your mortgage.

The downside to this strategy is that you may need to negotiate a payment plan with the charge off creditor, who may not be open to this approach, although it certainly does not hurt to ask. Additionally, because this approach takes longer to resolve the charge off, it takes more time to benefit your credit score.

In closing, while you can certainly use the proceeds from a cash out refinance to pay off a charge off, we recommend that you review all of your financing options. There may be alternate solutions that enable you to address the issue more directly and cost-effectively.


"Standard Eligibility Requirements: Cash-Out Refinance"  Eligibility Matrix.  Fannie Mae, October 2 2019.  Web.

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About the author
Harry Jensen, Mortgage Expert

Harry is the co-founder of FREEandCLEAR. He is a mortgage expert with over 45 years of industry experience. Over his career, Harry has closed thousands of loans for satisfied borrowers and now offers his advice and insights on FREEandCLEAR.  Harry is a licensed mortgage professional (NMLS #236752). More about Harry

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