Interest is only deductible on acquisition debt -- debt used to buy, build or substantially improve your home. You have to go back to the home purchase and trace the balances of the loans.
For example:
1. You buy the home for $180,000 including $30,000 down and a $150,000 mortgage. That $150,000 is your acquisition debt.
2. You take a cash out refinance for $200,000. At the time of the refinance, the remaining balance on the first mortgage was $140,000. Your acquisition debt is now $140,000.
3. You can include in your acquisition debt, money spent on improvements that were made up to 90 days before the refinance or up to 2 years after the refinance. If you spent $20,000 on improvements within the correct time frame, your acquisition debt is now $160,000.
4. As you pay the mortgage, you can consider that you pay equity debt first. So, suppose that after 1 year, you refinance to get a lower rate. Your old balance is paid down to $195,000, you can consider that your acquisition debt is still $160,000. If you refinance for $195,000 to get a lower interest rate, your acquisition debt is still $160,000.
In the end, that means that 160/195, or 82% of your interest is deductible. Turbotax should help with this calculation.
