Allowing individuals to deduct the interest they pay on their mortgages and home equity loans, no matter what, but not on regular loans, must rank up there with the worst public policy moves of all time. The rationale for allowing tax deductions of mortgage interest payments is to encourage home ownership, which is reasonably thought to have positive societal externalities. By contrast, allowing individuals to deduct their interest payments when they refinance for a much higher sum than their original purchase price, and to deduct home equity loan interest, actually encourages individuals to put their home at risk. As a recent housing shopper with sharp internet research skills, I was amazed at how many individuals who should have had their original mortgage completely paid off instead owed hundreds of thousands of dollars from either refinancing or home equity loans, often almost as much or more than the house was currently worth. Unfortunately, many people bought into the demonstrably false mantra (wasn't anyone paying attention in the late '80s and early '90s?) that "housing prices never go down," and just kept taking more equity out of their home every so often, usually for present consumption, on the theory that they could always refinance again if they ran into trouble repaying their loan.
The newspapers are now full of stories about families that are losing their homes after refinancing or taking out home equity loans. How much dumber can a social policy be than to encourage, through the tax code, individuals to risk title to their house so they can finance SUVs, cruises, and the like? If anything, home equity loans and cash-back refinancing should not be deductible and loans for cars, boats, and vacations should be. At least then, the government would be encouraging individuals to take loans that carry much less risk to themselves and their families; having your SUV repossessed is a far cry from losing your house to foreclosure.