This is a case where you can't have it both ways. You can treat this as a personal mortgage, in which case you can deduct 23.1% of the interest on schedule A as a personal mortgage, and not deduct the rest as a rental expense. Or, you can deduct 76.9% of the loan as a rental expense on schedule E, and not deduct the rest on schedule A. (500,000 ÷ 650,000 = 76.9%.)
Also, to deduct the loan as a rental expense (because the loan is not secured by the rental property), you must be able to prove to the IRS, what part of the interest expense is directly traceable to the rental property. It sounds like you can do that pretty easily for now, since you took one loan and used it for two specific and traceable purposes. But if you start using the refinance money for other expenses, or if you refinance again and things get mixed up or complicated, the IRS can deny the deduction if you get things so mixed up and complicated that you can't trace the interest back to the rental property.
