The Surprising Hidden Benefit of Higher Interest Rates

YOUR COST OF BORROWING MAY BE LOWER THAN YOU THINK

THE HIGHER THE INTEREST RATE, THE BIGGER THE TAX DEDUCTION.

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. In the past few years, not as many home buyers benefited from this because their total annual interest expense was lower than their standard deduction.

However, the mortgage interest deduction can be very useful today. For example, a $500,000 mortgage at a 7% interest rate has an annual interest expense of $35,000. This far exceeds the standard deduction. This also means that the homeowner in this example is more likely to itemize and benefit from the mortgage interest deduction.

HOW BIG IS THE TAX BENEFIT?

Step 1: Express your tax bracket as a decimal: for example, 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: 7% x 0.76 = 5.32%

In this example, a 7% mortgage costs 5.32% after-tax for someone in a 24% tax bracket.

PLEASE NOTE: THIS ARTICLE IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL, TAX, OR FINANCIAL ADVICE. PLEASE CONSULT WITH A QUALIFIED TAX ADVISOR FOR SPECIFIC ADVICE PERTAINING TO YOUR SITUATION. FOR MORE INFORMATION ON ANY OF THESE ITEMS, PLEASE REFERENCE IRS PUBLICATION 936. Also, this article is not an offer or commitment to lend you money, and it is not an advertisement for a specific mortgage or a specific interest rate.

NOTE: this only applies if you itemize your tax deductions. Generally, you'll only itemize if your total itemized deductions exceed the standard deductions listed below:

$30,000 for married taxpayers filing a joint return.
$15,000 for single taxpayers.

Source: Momentifi