@zomboo: You are partially correct in terms of how interest is calculated, and I was not correct in how to calculate it. I oversimplified and I think you did too. The actual amount splits the difference between our inaccurate methods. I followed IRS 936 to the letter here.
I did a spreadsheet using the example of $500k total split $150k home acquisition and 350k home equity.
I used 5%, 30 year mortgage, starting Jan 1, so a full year of payments.
The average total balance for the year is $496052 because of payments reducing the principal.
Average acquisition balance is $150000
Average home equity balance is $346052 because of payments reducing the principal
Deductible interest is 150000/496052= .302 x total amount of interest. (IRS 936 says round to 3 decimal places)
So deductible home interest is $7449. vs $7500 using my incorrect way of calculating, and vs $7400 using your way of calculating (.3 x total amount of interest)
Might as well be accurate following pub 936. Thanks for pointing this out.
