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 |