Your cost of borrowing may be lower than you think. Homeowners who itemize tax deductions can deduct the interest on up to $750,000 of mortgage balances used to buy, build or improve a qualified home. Here’s how to figure out the impact of that tax deduction:
- WHAT IS YOUR MARGINAL TAX BRACKET?
- In our example, we’re going to use a tax bracket of 24%.
- WHAT IS YOUR MORTGAGE RATE?
- In our example, we’re going to use a mortgage rate of 4.5%
- WHAT IS YOUR AFTER-TAX INTEREST RATE?
- Step 1: Express your tax bracket as a decimal: 24% = 0.24
- Step 2: Subtract that number from the whole number one: 1 – 0.24 = 0.76
- Step 3: Multiply that number by your interest rate: 4.5% x 0.76 = 3.42%
In this example, a 4.5% mortgage costs 3.42% after-tax for someone in a 24% tax bracket.
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