How to Calculate the Effective Mortgage Interest Rate After Deductions

According to the U.S. Government Accountability Office, the mortgage interest deduction is the third largest tax expenditure, costing the Internal Revenue Service about $80 billion in lost tax revenue as of 2009. Because of the deduction for mortgage interest, you can save money on your taxes that lowers your effective interest rate. To calculate the effective mortgage interest rate, you need to know your current interest rate and your tax bracket. Your tax bracket is the tax rate you pay on your final dollar of income.

Instructions

1. Divide your tax bracket by 100 to convert to a decimal. The IRS published the tax brackets for each filing status toward the end of IRS Publication 17. Your tax bracket is the tax rate you pay on your last dollar of taxable income. Unless you have already figured your taxable income for the year, you have to estimate your taxable income based on your expected income and deductions. For example, if your tax bracket equals 31 percent, divide 31 by 100 to get 0.31.

2. Subtract your tax bracket as a decimal from 1. In this example, subtract 0.31 from 1 to get 0.69.

3. Multiply the result by your mortgage interest rate to find your after-tax mortgage interest rate. Completing the example, if you pay 6.7 percent on your mortgage, multiply 6.7 percent by 0.69 to find your after-tax effective mortgage interest rate equals 4.623 percent.

References

• U.S. Government Accountability Office; Home Mortgage Interest Deduction: Despite Challenges Presented by Complex Tax Rules, IRS Could Enhance Enforcement and Guidance; July 2009
• Bankrate.com; Pay Down the Mortgage or Invest?; Don Taylor; January 2006
• Internal Revenue Service: Publication 17