Going from Owner carry to FHA loan

[Baron Hollowell]

So I have bought my first duplex with owner financing and had to put a size-able down payment for them to be willing to do it. They agreed to a 2 yr balloon on 10 yr mortgage terms. I am self employed so I wasn't able to qualify at the time. Now a year later I am trying to refinance to pull my equity back out to purchase more property. The issue I am having is the banks term loans. So they will do a conventional loan with 75% LTV and part of the loan will have a cash out. My issue is the cash out isn't all my equity originally put in. And I am stuck with a higher downpayment. What I am trying to do is have a 3.5% DP on the original loan price with a FHA or conventional and pull my equity. So here are the actual numbers. For it to be clearer.

Purchase 262k, downpayment of 120k. 5% interest;10 yr mortgage, 2 yr balloon.Currently owe 130k now. 

Bank offered; conventional 30 yr cash out refi. 5% with a .25% bump for cash out. 75% LTV.

280K estimated appraisal= 210K Balance LTV. Subtract 8400 for estimated 4% closing cost= 201600.

201600-130000 remaining mortgage to owner finance= 71600 net amount cash out. 

My issue is that means I would like to get the remaining balance of my equity (ie 120k-71600=48400, and then some for 1 yr of payments).

Has anyone else had similar issues?