The method you have outlined is simply not allowed. Calculating the interest deduction separately on each mortgage and adding the amounts together exceeds the $750K total mortgage deduction limit. You must add the average balance of each mortgage together and apply the $750K limit to this sum.
Since you say that when you enter the data for the second mortgage the deduction allowed is reduced, it may be beneficial for you to use the Exact method which, in your case, applies the $750K limit to the interest on the first mortgage and none of the interest on the second mortgage. However, you can't pick which mortgage is first and which one is second. The first mortgage is the one with the earliest origination date.
