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In most cases, you can deduct all of the interest you pay on any loan that is secured by your home, whether the loan is called a mortgage, a second (or third, fourth, fifth, etc.) mortgage, a home equity loan, a line of credit, or a home improvement loan. Your lender will mail you an end-of-year statement that breaks down your house payment into components, and tells you exactly how much interest you paid. You can't deduct the portion of the payment that goes toward repaying the principal amount of the loan.
A loan "secured by your home" means that, under the loan agreement, the lender has the right to take the house ("foreclose") if you don't make the payments. This generally means that if you or your spouse take a loan from a 401(k) plan at work to make a down payment on a house, you can't deduct interest on the 401(k) loan because it is not secured by a mortgage on the house.
Generally, as long as the loan is secured by the home, if doesn't matter what you actually spend the money on. For example, you can take out a home equity loan and use the money to buy a car, take a vacation, consolidate credit card debts, or anything else you choose. However, the dollar limits discussed below can differ, depending on how the loan proceeds are spent.
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