The rule applies immediately. You can only deduct interest on the part of the debt that is acquisition debt. The part that is equity debt is non-deductible. You may need to trace your loans and expenses to determine the current amount of acquisition debt. (You can report whatever you want, but if audited, the IRS doesn't have to award any deduction you can't prove.)
For example, you bought your home for $100,000 with an $80,000 mortgage. That is your qualified acquisition debt. You've paid that off and the balance is now $50,000. That is still qualified acquisition debt.
Then 10 years ago you took out a second mortgage for $50,000 and used $10,000 for home improvements and $40,000 for other expenses. The $10,000 used for improvements is also considered qualified acquisition debt. Suppose that the balance is now paid off to $15,000. You can treat the qualified acquisition debt as paid off last, so in this case that second mortgage is $15,000 outstanding balance with $10,000 of qualified acquisition debt, so the interest is 66% deductible and the interest on your first mortgage is 100% deductible.
Let's assume instead that you refinanced the house for $100,000 instead of taking out a second mortgage. You had $50,000 of qualified acquisition debt leftover from the purchase and you added $10,000 of qualified debt from the improvement, so your qualified acquisition debt is $60,000. If the balance today is $75,000, then 80% of your interest is deductible.
