I don't believe the point is that the loan must be secured by a business loan (schedule C or E)
the tracing argument is that if the loan is secured by the home (cash out refi) and then money was used to fund a business endeavor, then the money is not deductible on Schedule A, since it was not used to improve the home that the loan collateralized, HOWEVER, because of tracing rules, it would be deductible on Schedule C because the money was used in a business.
Similarly a cashout on your primary residence with the proceeds used to purchase a 2nd home would not qualify as deductible interest as it would have to go on Schedule A.
