Question about cash-out refinance

[Andrea Hewitt]

I have a question about cash-out refinancing that I am hoping someone can answer for me. It takes a bit of explanation so please be patient with me.

When applying for a mortgage to purchase the property, the lenders want the investors to put down at least 20% so that the investor is more vested in the property and therefore less risky. This makes sense.

However, when doing a cash out refinance, the amount that the bank bases the new loan on is the current value of the house. Since this is more than the purchase price, (due to market forces, or property improvements) it allows the investors to pull out their initial 20% cash investment.

My question is, why does the lender in the cash out refinance not see that as a risky loan? How much the investor initially paid for the property, and how much cash they invested is not a secret. Why does that second mortgage lender not care if the investor is no longer personally vested with cash in the property?

Thank you!