With $500K/1M mortgage int &100K home equity int deductible, what limit applies to HELOC interest in 1st lien position if it is used to refi 1st mortgage interest?

[japersinger]

For example, we purchased a home for approx 400K and obtained a mortgage for approx 320K while making a 80K down payment. Assuming we refinance the 320K first mortgage utilizing a HELOC in first lien position, is all interest on the 320K HELOC deductible since it is not technically a traditional home equity loan in second mortgage position exceeding the initial acquisition financing/balance?

[DianeW · Accepted solution]

The purpose for the limit on HELOC loans is because of the money used for other purposes, rather than to buy, build or improve your main home. Since your debt is fully invested in your home you can deduct the full amount of the mortgage interest paid in 2017.

If you took out a loan for reasons other than to buy, build, or substantially improve your home, it may qualify as home equity debt. In addition, debt you incurred to buy, build, or substantially improve your home, to the extent it is more than the home acquisition debt limit ($1M for 2017), may qualify as home equity debt.

Any money from the HELOC that is not used on the home, but for other personal purposes such as a vehicle purchase or educational tuition, would be limited to $100,00 of debt.  This type of use will be limited or will eliminate deduction for 2018.