again, see publication
https://www.irs.gov/pub/irs-pdf/p936.pdf
1) look at the top of page 10 (in the middle).
You build or substantially improve your home and take out the mortgage within 90 days after the work is completed. The home acquisition debt is limited to the amount of the expenses incurred within the period beginning 24 months before the work is completed and ending on the date of the mortgage. (See Example 2, later.)
so the expenses you incur in the 24 months leading up to the date you take out the mortgage that were used to improve your home are eligible.
2) no. See my other post. let's say in Year 1 you borrow the $200,000 immediately use $150,000 for the improvements. 3/4 of the Year 1 interest is deductible. Then at the end of the year, you realize you'll never need the remaining $50,000 and repay it to the bank. While the payment won't change (as you note), the interest will go down and the principle payment will go up substantially which is why the loan gets paid off earlier. in Year 2 and forward, 100% of the interest is deductible as the 100% is related to the $150,000. The IRS assumes personal debt ($50,000) is paid back before qualified secure debt ($150,000) ; they do not assume pro-ration.
