How to Calculate a Mortgage Rate After Income Taxes
The federal government allows you to take a tax deduction for the interest that you pay on your mortgage. This deduction decreases your taxable income, thereby decreasing the amount of taxes you owe because you paid mortgage interest. Because of this deduction, you effectively pay a lower rate of interest on your mortgage than you would if the mortgage interest deduction were not allowed. To calculate your after-tax rate for your mortgage, you need to know the mortgage interest rate, your taxable income and filing status.
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Instructions
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1
Determine the interest rate on your mortgage. If you do not know it, you can contact your lender or refer to a mortgage statement.
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2
Determine your marginal tax rate by using a income tax chart (see resources). For example, for 2010 if you are single and have an adjusted gross income of $200,000, you fall in the 28 percent tax bracket.
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3
Convert the marginal tax rate from step 2 to a decimal by dividing by 100. For example, 28 percent would become 0.28.
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4
Subtract the result from step 3 from 1. For example, 1 minus 0.28 would be 0.72.
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Multiply the result from step 4 by your mortgage interest rate. For example, if your mortgage rate is 6 percent, your after-tax mortgage rate would be 4.32 percent.
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Tips & Warnings
If your state has an income tax, add your marginal tax rate for your state to the marginal federal income tax rate in step 2.
You can only claim the mortgage interest deduction if you itemize your deductions, which means giving up the standard deduction. If you do not itemize, you cannot take advantage of the tax deduction.
