CALCULATING THE TRUE
("NET")
INTEREST RATE ON YOUR LOAN!
When interest rates begin to increase, buyers can hesitate to proceed with a
home purchase, perhaps hoping that interest rates will again decline. Interest
rates are unpredictable but, under most circumstances, it is not advisable to
wait for rates to go down. It may be helpful, instead, to examine the exact
cost of a mortgage. It may surprise you to discover that the "net"
cost of a mortgage is so much less than the face rate.
Because interest payments are
deductible for federal income tax purposes, the net cost of interest on a
mortgage is lowered. The actual amount depends upon the individual's tax
bracket. As the accompanying table illustrates, the net mortgage cost lessens as
the tax bracket increases. A buyer in the 18% bracket holding an 7% mortgage
has a net interest cost of 5.74% whereas the same note held by an owner in the
42% bracket has only a net cost of 4.06%. Perhaps this is one reason why the
sales of more expensive homes are not as severely impacted as those in lower
price ranges in tight money situations?
You can determine your net cost.
First, determine your tax bracket by referring to your tax filing. Your tax
advisor might assist you if necessary. Subtract your tax bracket number from
100 and multiply the resulting figure by the stated interest rate of the
mortgage. The answer is your net cost.
As a tax deduction for federal income
tax purposes, the interest payment on a mortgage is like a subsidy for the home
owner. You still pay the amount of money required for the loan, but a portion
would have been paid to the IRS anyway. In essence, you "save" the
amount of the deduction in taxes and supplement your mortgage payment instead.
Just one more reason to consider
making that home purchase now rather than wait for an improvement in the
interest rates. If you have difficulty figuring your net rate or determining
what might be your net rate in the event that you purchase, give us a call at Humboldt
Home Loans. In the meantime, the chart below may be helpful.
|
Tax Bracket
|
Net Cost
@ 5%
|
Net Cost
@5.5%
|
Net Cost
@6%
|
Net Cost
@6.5
|
Net Cost
@7
|
|
18%
|
4.10
|
4.51
|
4.92
|
5.33
|
5.74
|
|
22%
|
3.90
|
4.29
|
4.68
|
5.07
|
5.46
|
|
28%
|
3.60
|
3.96
|
4.32
|
4.68
|
5.04
|
|
36%
|
3.20
|
3.52
|
3.84
|
4.16
|
4.48
|
|
42%
|
2.90
|
3.15
|
3.48
|
3.77
|
4.06
|
|
50%
|
2.50
|
2.75
|
3.00
|
3.25
|
3.50
|
Never a Better Time to Buy
Webpage/true interest
|