The classification is the investor's, not the borrower's, and it does not turn only on whether money changes hands. Fannie Mae lists, among the acceptable uses of a cash-out refinance, paying off subordinate mortgage liens of any age and "financing a short-term refinance mortgage loan that combines a first mortgage and a non-purchase-money subordinate mortgage into a new first mortgage." The practical consequence is that a borrower who believes they are simply consolidating two existing mortgages, and who receives nothing at the table, can still be underwritten under the cash-out rules, at the cash-out ceiling and the cash-out price. FHA and VA each draw the line in their own rules rather than adopting anyone else's, so the first question to put to a lender is not what the rate is but which category the loan is being written in.
Seasoning rules exist because the transaction was abused, and they are specific. Fannie Mae requires that an existing first mortgage being paid off be "at least 12 months old at the time of refinance, as measured by the note date of the existing loan to the note date of the new loan," and separately that "at least one borrower must have been on title for at least six months prior to the disbursement date of the new loan." Each carries its own narrow exceptions: the twelve-month rule does not reach subordinate liens being paid off or the buyout of a co-owner under a legal agreement, and the six-month title rule is waived where the borrower inherited the property or was legally awarded it in a divorce, separation or dissolution. There is also a delayed financing exception that most borrowers never hear about: someone who bought a property for cash within the past six months can take a cash-out refinance up to their documented investment plus financed costs, provided the purchase was arm's length, no mortgage financing was used, and the source of the purchase funds is documented. FHA writes its own cash-out conditions into HUD Handbook 4000.1 rather than into the regulations, and it changes them by mortgagee letter between handbook revisions. Mortgagee Letter 2019-11 is the example worth knowing: it cut the FHA cash-out maximum loan-to-value from 85 percent, where it had sat since 2009, to 80 percent, for case numbers assigned on or after September 1, 2019. The trap is that superseded editions of the handbook remain downloadable from hud.gov itself, at plainer URLs than the current one, so a reader who finds a figure in an official-looking PDF has no way to tell from the document whether it is still in force. A program limit is worth confirming with the lender writing the loan rather than taken from a document found by searching.
The VA rules take a different shape, and one of them exists nowhere else. Congress imposed a fee-recoupment test, a net tangible benefit test and a seasoning requirement on VA refinances at 38 USC 3709, then expressly switched all three off for cash-out loans at 3709(d)(1), directing the Secretary instead to write rules "to ensure that such refinancing is in the financial interest of the borrower." The resulting regulation, 38 CFR 36.4306, trades the statute's three specific tests for a ceiling and a disclosure regime. The new loan "must not exceed an amount equal to 100 percent of the reasonable value" of the property. A net tangible benefit test must be satisfied, met by at least one of eight listed outcomes, such as eliminating mortgage insurance, shortening the term, lowering the rate, lowering the payment, increasing residual income, or bringing the loan to 90 percent of reasonable value or less. And the lender must give the borrower "an estimate of the dollar amount of home equity that, by refinancing into a new loan, is being removed from the reasonable value of the home," and explain that removing it "may affect the borrower's ability to sell the home at a later date." That disclosure, plus a six-item side-by-side comparison of the old and new loans, has to be delivered twice, within three business days of application and again at closing, with the borrower certifying receipt each time.
Two consequences carried by other pages are worth stating once here as premises rather than re-deriving. The interest on the portion of a refinancing above the balance it retired is not automatically deductible mortgage interest; the tracing rules that decide it belong to the mortgage interest deduction. And a refinance of a principal residence with a lender other than the current one is fully rescindable, while a same-lender refinance is rescindable only to the extent of the new money, which is precisely the cash-out portion. Refinancing covers that rule and quotes the regulation.
