Out of 500K loan, 150K is home acquisition indebtedness and 350K is home equity indebtedness. Now when 350K was used for buying the rental home, 350K changed from being home equity indebtedness to being a loan which was used to borrow a property which generates income. Because income is taxed, the interest incurred for generating that income can be set of against the same. Here is how loan split looks like:
Home acquisition indebtedness 150K
Home equity indebtedness 0
Loan which funded rental 350K
Now, you have no obligation to pay off 350K before you pay off 150K, You can account such that everything you are paying off in a year is bringing 150K down till you have nothing left to pay off in 150K and then starts paying off 350K. Remember, 350 loan is generating you income and income is taxed. Interest on the loan can be set off against that interest.
Please let me know whether you have a different take on this.
