Excerpt from Money Magazine.

Low interest rates have elevated mortgage refinancing and home-equity borrowing to national sports in recent years. Now comes the tax hangover.

Refinancing

You can usually deduct the points you pay on your original mortgage the year you pay them. Not so with a refinancing. Instead, you typically must spread the deduction over the life of the loan. An exception: If you do a cash-out refinance to pay for home improvements, the points attributable to the cash used for home improvement may be fully deductible. And if you are refinancing for the second (or third) time, you can now deduct all remaining points.

Home Equity

The same rules for deducting points apply to home-equity loans and home-equity lines of credit. When the money is used for work on the house, the points are deductible in the year the loan is taken out. If you use the extra cash for something else, you must spread the deduction over the length of the loan. The limits on deducting interest on home-equity loans are also tricky. The IRS caps the amount of home-equity debt for which you can deduct value minus the amount of the existing mortgage debt, whichever is smaller. The interest paid on any amount you borrow above these thresholds is not deductible.