Heloc or Mortgage in my case?

[Quixotic1]

Hello,

Less than a year ago I purchased a new primary residence. At the time I was low on cash so I took a line of credit on a commercial building I own @ 5% interest only with a 2 yr balloon and paid cash for the house.

Now that I have enough money to put down as much as 50% of the purchase price of the primary residence I am shopping for a mortgage on it to pay off the commercial line of credit.

The lenders I have spoken with wish to charge me 3/4% higher than standard rates because my house is paid off because it's now a cash-out refi. Best deal I can get on a 15 is 3.75% vs 3.00%! 

One banker I spoke with is offering a HELOC @ 1.5% under prime with no costs. The terms are a 30 yr amortization with a 10 yr conversion. Would the HELOC be deductible in this circumstance since I'm paying off the loan I used to buy the primary residence?

Any ideas about my best course of action at this time? 

Thanks!

RIch

[NCperson]

Don’t be confused by the words mortgage and heloc

In both cases you own the home free and clear and you are mortgaging the home by borrowing money.

The tax implications are the same either way