Home equity loans (second mortgages) and equity lines of credit (HELOCs) are popular ways for homeowners to consolidate debts or to make home improvements on their primary residences, especially if they don't want to refinance because their first mortgage rates are low. Mortgage refinancing can also be expensive, making second mortgages and home equity lines much more attractive options.

Second mortgages are also popular as "piggy back" loans to help finance down payments if the home-buyer doesn't have a lot of cash on hand, and for purchasing a second home. Many people are drawn to the tax advantages that second mortgages and HELOCs offer, especially since many states allow a 100% deduction on the interest paid on mortgage loans. However, there are certain limitations to second mortgage and HELOC tax deductibility.

According to Wells Fargo Bank, interest payments are usually fully deductible on:

Up to $1 million (up to $500,000 if married filing separately) in mortgage debt (acquisition debt).

Mortgages secured by your primary residence or second home.

Mortgages used to buy, build, or improve your primary residence or second home.

Home equity loans and lines of credit, if total amount of home equity debt on your main and second homes does not exceed $100,000 ($50,000 for married filing separately) and the total outstanding mortgages against the collateral property does not exceed 100% of the fair market value (FMV) of the property.

IRS Publication 936 states that interest on amounts over the home equity debt limit generally is treated as personal interest and is not deductible. But if the proceeds of the loan were used for investment, business, or other deductible purposes, the interest may be deductible.