<<However, it applies to paying down an existing loan.>>
and that is EXACTLY what you are doing!!!!! You are paying down a existing loan! ("paying off" a mortgage loan is just a more extreme form of "pay down" of a mortgage loan)
let's use an example.
I have a mortgage for $150,000.which I refinance up to $500,000, so $350,000 is non-aquisition debt.
Then i decide to refinance again and bring the balance down to $450,000.
First, I need to pay down the current mortgage company $50,000 in cash from my own pocket; it has nothing do to with the new mortgage company as they are not lending me that $50,000. They expect it to be paid down prior to them lending me the money (even if it on the closing statement, it is still 'prior to', by a nano-second, of them lending me the money).
Per the IRS 'rules of order" that $50,000 principle paydown has to pay down the non-aquisition debt.
Whether I pay down the mortgage by $50,000 without doing a 2nd refinance or do it as part of the refinance (what you call a 'cash in') the mortgage pay down is still occuring while the current $500,000 mortgage loan exists and the IRS rules of order state that that principle payments on an existing mortgage pay down non-aquisition debt first.
Then the new mortgage company lends me $450,000. $150,000 is aquisition debt and $300,000 is non-aqulsition debt.
This is very clear to me (and I was in the mortgage business for years) but at the end of the day, it is your tax return! and your risk of IRS audit!
