A lien is not the same as a mortgage. Yes, the lien still allows the finance company to take your house, however, the debt must be properly recorded and perfected under state law. If this loan was not properly perfected or recorded under state law, then NO, you still cannot claim the interest deduction.
See IRS Example below.
Ari owns a home subject to a mortgage of $40,000. Ari sells the home for $100,000 to Palmer, who takes it subject to the $40,000 mortgage. Ari continues to make the payments on the $40,000 note. Palmer pays $10,000 down and gives Ari a $90,000 note secured by a wraparound mortgage on the home. Ari doesn't record or otherwise perfect the $90,000 mortgage under the state law that applies. Therefore, the mortgage isn't a secured debt and Palmer can't deduct any of the interest paid on it as home mortgage interest.
If the loan is properly perfected and secured under state law, then it could be considered debt that would qualify for the mortgage interest deduction.
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