There's a lot concerning this that in my opinion, is just not clear in pub 936. One thing that matters is when the original loan was obtained - before or after October 12, 1987.
To start, you need to use table 1 on page 12 of pub 936. Take note that this is to figure your "CURRENT YEAR" (which is 2021) eligible interest deduction. Your yet-to-be paid for improvement costs won't get included until the tax year you actually use the cash out money to pay for them.
You are right to keep that money in a separate account, as if audited you have to be able to show the flow, as the tracing rules will matter.
