Make sure you keep good records for as long as you own the house plus 3 years after you sell (7 years is better). If the first mortgage was used to buy the house and the entire second mortgage (except for closing costs) was used for improvements, then both mortgages are acquisition debt and if you refinance them together as a new instrument, that amount of debt will still be considered acquisition debt, no matter what kind of debt instrument it is. Anything extra you take out (except for closing costs) will be considered equity debt and the interest is not deductible.
