Throw out the "HELOC" bank term, it's misleading.  This is acquisition debt used to buy, build or improve the residence.  If they opened a HELOC at the bank and used it to pay off credit cards, car loans, buy a jet ski, etc. it would be non-deductible for federal purposes and subject to the $100K limit for CA purposes.  But sounds like this isn't home equity debt, it's home acquisition debt.