While not all lenders define "cash-out refinance" in the same way, the most widely used definition is that of the two
Federal secondary market purchasers, Fannie Mae and Freddie Mac. Their rules define a cash-out refinance by exclusion, ie,
they define an ordinary or no-cash-out refinance, and any refinance that does not meet that definition is considered cash-out.
A non-cash-out refinance is one that a) is used to pay off a first mortgage, and/or junior mortgages that were used in
their entirety to buy the subject property; and b) is for an amount not in excess of the loan balance, plus settlement costs,
plus 2% of the new loan amount or $2,000, whichever is less. If the borrower has a mortgage balance of $150,000 and
settlement costs are $5,000, for example, the loan can be no larger than $157,000.
Any refinance that does not meet these specs is a cash-out refinance and will carry a higher interest rate. The major
reason for the higher rate is that studies of delinquency and default indicate that borrowers who do a cash-out subsequently
have poorer payment records than borrowers who don’t. The presumed reason for this is that borrowers who need cash are
financially weaker than borrowers who don’t, and in some cases they may be in financial distress.
Your transaction does conform to the no-cash-out definition because your second mortgage was not used to acquire your home.
While you don’t need cash now, you did need cash when you took the second mortgage. If you were in financial distress then,
perhaps you still are. In the view of Fannie Mae and Freddie Mac, that is an element of additional risk.
You must have spoken to portfolio lenders -- those who originate loans to hold rather than to sell in the secondary market.
Some of those might apply an older rule that says that after a second mortgage is on the books for a year, it is no longer an
indicator of additional risk. You might want to go back to these lenders after a year elapses, when they will no longer view
your loan as cash-out. The much more numerous lenders who sell in the secondary market will continue to view your deal as
cash-out.
