The Interest on Grandfather Debt, a mortgage
taken prior to October 13, 1987, is tax deductible

If you took out a mortgage on your home before October 14, 1987,
or you refinanced such a mortgage, it may qualify as grandfathered
debt.  To qualify, the refinanced mortgage must have been
secured by your qualified home on October 13, 1987.  How you used
the proceeds does not matter.

Grandfather debt is not limited.  All of the interest you paid on
grandfather debt is fully deductible home mortgage interest.
Note that the amount of your grandfathered debt reduces the $1
million limit for home acquisition debt and the limit based on your
home's fair market value for home equity debt.

Refinanced Grandfathered Debt
If you refinanced grandfathered debt after October 13, 1987, for an
amount that was not more than the mortgage principal left on the
debt, you still treat it as grandfathered debt.  If the new amount is
greater than the mortgage principal, it is treated as home equity
debt or home acquisition debt.  The mortgage is a "mix-use
mortgage".    The debt must also be secured by the qualified
home. 

You treat grandfathered debt that was refinanced after October 13,
1987, as grandfathered debt only for the term left on the debt that
was refinanced.  After that, you treat is at home acquisition debt or
home equity debt, depending on how your use the proceeds. 

Exception:
If the debt before refinancing was like a balloon note (the principal
on the debt was not amortized over the term of the debt), then you
treat the refinanced debt as grandfathered debt for the term of the
first refinancing.  This term cannot be more than 30 years. 

Example:
Jim took out a $250,000 first mortgage on his home in 1983.  Jim
decided to refinance in 1992 with a new 30 year mortgage.  The
refinanced debt is treated as grandfathered debt for its entire term
(20 years).

Line-of-Credit Mortgage
If you had a line-of-credit mortgage on October 13, 1987, and
borrowed additional amounts against it after that date, then the
additional amounts are either home acquisition debt or home equity
debt depending on how you used the proceeds. The balance on the
mortgage before you borrowed the additional amounts is grandfathered
debt. The newly borrowed amounts are not grandfathered debt because
the funds were borrowed after October 13, 1987.


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