What's Your After-Tax Mortgage Rate?

Many homeowners are entitled to two major tax deductions -- one for annual interest paid on a home loan, and another for real estate tax bills paid to government. Calculating your approximate tax credit is basic:

1. Add mortgage interest paid and real estate taxes paid together
2. Find your marginal tax rate
3. Multiple your tax bracket by the sum of Step 1

So, for a homeowner that paid a combined $13,000 in mortgage interest and real estate taxes last year, and who is in the 28% marginal tax bracket, a tax credit of $3,640 may be due from the IRS. This credit is one reason why some people sometimes refer to "after-tax mortgage rates". An after-tax mortgage rate is the adjusted interest rate after the IRS doles out credits and is calculated as follows:

(After-Tax Mortgage Rate) = (Mortgage Rate) * (1 - Marginal Tax Rate)

The same homeowner with a 6.000% mortgage rate, therefore, has an after-tax mortgage rate of 4.32%.

Because not every homeowner is eligible for mortgage interest and/or real estate tax deductions, and because not every homeowner should claim them, you should consult with your accountant to see how tax credits fit into your tax liability schedules. Federal income taxes are highly personal and require the attention of an experienced professional.