Sorry, I am now confused. I want to understand what the IRS rules require. You say that the rules require you to offset the home equity debt first, then say it doesnt matter, so I am confused.
According to pub 936, it says "
Refinanced home acquisition debt.
Any secured debt you use to refinance home acquisition debt is treated as home acquisition debt. However, the new debt will qualify as home acquisition debt only up to the amount of the balance of the old mortgage principal just before the refinancing. Any additional debt not used to buy, build, or substantially improve a qualified home isn't home acquisition debt."
But it doesnt say how you allocate the refi debt if it is lower.
In case you are wondering why I want to decrease my home acquisition debt, it is because I no longer itemize for federal. So any interest I pay on home acquisition debt is lost and not deductible. Whereas equity debt that I can use for Sch E either offsets income now or later. So for the federal, I prefer to minimize home acquistion debt and maximize home equity debt. Paying the debt down to a certain limit (conventional) lowers interest rates.
Thank you!
