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And apparently the IRS sees morgage and home equity loan as 2 different animals.

I think the problem here may be semantics. A home equity loan is still a mortgage. The definition in the IRC refers to home equity indebtedness, and defines it roughly as any indebtedness against your principal residence in excess of the original acquisition debt.

So even though you are taking out a "home equity loan," based on what you described I think what you are doing is simply refinancing your mortgage and taking out an additional $75k of equity. The fact that it is in a single mortgage, not two mortgages, is irrelevant.

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