Home Equity Debt Consolidation Defined with a
breakdown of the Limitations

Home equity is the current market value of a home less the
outstanding mortgage balance.    It is essentially the amount of
ownership that has been built up by the holder of the mortgage
through payments and appreciation of the property.

Learn more about home equity loans here

Definition
Home equity debt is defined by the IRS as a loan that you take out
for reasons other than to buy, build or substantially improve your
home.  To qualify as home equity debt, your mortgage must have
been taken out after after October 13, 1987 and meet both of the
following requirements:
1)  Does not qualify as home acquisition debt or as grandfathered
      debt. 
2)  Is secured by your qualified home. 

Example:  Kevin Laird purchased his home for cash in 1995.  He
did not have a mortgage on his home until last year, when he took
out a $30,000 loan, secured by his home to pay for his son Joshua's
college tuition.  This loan is home equity debt.

Home Equity Debt Limit
There is a limit on the amount of debt that can be treated as home
equity debt.  The total home equity debt on your main home and
second home is limited to the smaller of:
1)  $100,000 ($50,000 if married filing separately)
2)  The total of each home's fair market value (FMV) reduced (but
      not below zero) by the amount of its home acquisition debt and
      grandfathered debt.  Determine the FMV and the outstanding
      home acquisition and grandfathered debt for each home on the
      date that the last debt was secured by the home. 

Example:
Doug owns a home that he bought in 1997.  It's fair market value is
$120,000, and the current balance on the original mortgage (home
acquisition debt) is $105,000.  Wells Fargo offers Doug a home
mortgage loan of 125% of the FMV of the home less any
outstanding mortgages or other liens.  Doug decides to take out
a home mortgage loan of $45,000 [(125% x $120,000) - $105,000]
with Wells Fargo.  Doug's home equity debt is limited to $15,000.
This is the smaller of:
1)  $100,000, the maximum limit, or
2)  $15,000, the amount that the FMV of $120,000 exceeds the
      amount of home acquisition debt of $105,000.

The interest on $15,000 of the home equity debt is fully deductible.
The interest on the remaining balance of $30,000 is generally
treated as personal interest and is not deductible.  The interest
may be deductible if the proceeds of the loan were used for
investment, business, or other deductible purposes. 

For specific rules about the interest you can deduct read IRS
publication 535


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