I think you're on the right track.  Follow the money.  One technical correction, the home equity limit is $0.  If the extra $50K cash-out on the refi #1 is used to substantially improve home #1 then it becomes $50K of home acquisition debt.  But it counts as "new" loan proceeds and would be subject to the $750K  limit (which you're already in excess of).  If it's used to pay off a car loan, go on vacation, etc. then it's subject to the $0 home equity debt limit.  Either way, the interest is not deductible.  You do still need to track it though since, if it's used for improvements, it may become relevant in the future when the total acquisition debt loan balance drops below $750K (i.e. if home #2 is sold and that loan paid off, then suddenly it matters what your $50K cash was spent on.)

Are we having fun yet?

I suspect anyone using TurdoTax will just deduct the whole thing.  I also suspect I'm in the minority of paid preparers who are actually tracking this stuff.  Most of this is just going to go from the 1098 to Sch A without anyone batting an eyelash. 😞

Rick