Lower mortgage rate(payment) vs Effective after tax expense

bee

This is very off...topic. I was sent this calculator when I requested some information about interest rates this week.

This calculator is a home mortgage comparison tool that allows you to compare up to three different mortgage scenarios. I spent some time this week looking at my present 30 year mortgage. I refinanced last August at 4.4% on a loan value of $150K. I wanted to see if this week's new lower rates (under 4%) are worth considering. I uncovered an interesting fact...for me at least. A lower interest rate does not necessarily mean a lower mortgage payment after taking the tax deductible interest advantage into account. In other words, home interest mortgage helps offset federal income tax...the more interest the better...at least that what I gathered from this cool tool.

It was counter intuitive to find that an 8.5% interest rate on my home loan is actually a more effective way of reducing my federal income tax and my overall mortgage borrowing costs. At 8% interest, my interest costs went up over $400/payment but since the government is willing to give me a income tax credit on this interest we're all good. This calculator allows you to take comfort in the effective monthly payment which is what we really should be fussing over not the large interest number behind the curtain.

I actually found that my "total effective monthly mortgage payment" would be lower if my mortgage rate was higher...a lot higher. An 8.5% rate gave me the best result. See the comparison below.



The debt to income calculation that banks use to qualify borrowers adds another chapter to this discussion. This really is were things shake out. A borrower's "income" qualifies the principal and interest payment of the loan with the bank (government). At tax time, government also uses the borrower's "income" to determine the borrower's income tax bracket. This tax rate is used to offset the borrower's income tax based, in part, on the mortgage interest costs.

This is the real borrowing cost...I think...and therefore a lower mortgage interest rate may not be an overall benefit to your government or your bank's bottom line...or something like that.

Mortgage Calculator:
http://www.tbwsratealert.com/MortgageCalculatorPage.aspx?openwin=y

Old_Joe

I think that you've discovered a new application for the laugh-er curve!!

bee

Reply to @Old_Joe:

I really do need to get a new hobby.

I took this %$^# calculator out to 13.5% and I finally stop saving money on my income taxes. Oops...my interest payment at 13.5% just funded another yacht at fannie mae...oops, that's the government. ohhh...never mind!

StevieG2

I think something's wrong with the calculations. If I look at the totl interest - tax savings, I spend more money at the higher interest rate. However, the calculator says my effective monthly rate is lower. # of years is the same. Doesn't make sense. If I spend more money, my effective monthly payment should be higher.

I suspect the effective monthly payment is merely the amount you pay on the loan, not the overall costs (real cost).

Old_Joe

Infidel!! You dare to question the Laugh-er Curve??

bee

Reply to @StevieG2:

AARP had their own version of a mortgage tax savings calculator. May require you to download javascript plugin.

http://www.aarp.org/money/credit-loans-debt/mortgage_tax_calculator/

There's also an income phase out on mortgage deductions detailed here:
http://www.financialsamurai.com/2011/05/25/mortgage-interest-deduction-limit-and-income-phaseout/