Based on the description and clarification above, you are qualified for Home Equity Debt vs Home Acquisition Debt. Due to a certain limitiation described in the document with link: http://www.irs.gov/pub/irs-pdf/p936.pdf, the deductible interest amount is very limited especially when your equity is not built up siginificantly. The rest of interest will be considered as personal interest which is not deductibile.
If you want to get the Home Equity Debt Interest fully deductible, you must use the full amount in some investment. If the investment is some rental properties, you may get the Interested fully deducted as investment cost which offset your rental income.
For each property listed in 1040 schedule E, you may add the interest amount proportionally to the original investment capitol for each property including purchase price, closing cost, and renovation cost if it's funded by the home equity fund on line "13 Other Interest".
Hope this helps.
