Yes, as long as the cash-out is not used for the home, the interest isn't deductible. One way to understand the IRS rationale behind it is that they expect the value of your home to increase when it is improved. That means that when the house is eventually sold in the future, the IRS will receive more tax from the sale. Because of this, they let you deduct the interest now as an incentive to go ahead and improve the home, since they anticipate receiving more down the road. If you use the refinance cash for something other than the improvement of the home, that money is no longer going to generate tax revenue for the government, so they won't allow you to deduct it.
