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And let me point out - since you have no mortgage on your current house, the interest on the cash-out mortgage that you get will not be deductible, unless it's used to substantially improve your home.

The original post said this would be a mortgage "for a new home" - as in they are going to purchase a house.
And that IS deductible under the current tax law. Doesn't matter if the current house is paid off or not as that doesn't enter into the tax rules for a mortgage for purchasing a home.

However, the mortgage interest deduction still may not matter for the OP.
The standard deduction may be larger, which means the mortgage interest doesn't matter taxwise.
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