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Interest paid on a home mortgage is normally tax deductible. That is, you can subtract the total mortgage interest paid over the year in determining your taxable income. This is one advantage of buying a home. Suppose you take out a 30-year home mortgage for $250,000 at an APR of 8% compounded monthly. The mortgage payments details for the first year are given below. Suppose that your marginal tax rate is 30%. What is your actual tax savings due to mortgage payments?

 

Guest Apr 10, 2018
edited by Guest  Apr 10, 2018
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6+0 Answers

 #1
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What is the question that you don't understand?

Guest Apr 10, 2018
 #2
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Hopefully it's easier to read my question now thanks!

Guest Apr 10, 2018
 #3
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Well, are they talking about 1 year saving or over the lifetime of the mortgage? For one year savings, they have already listed for you in the bottom left-hand side as $5,977.36. If they are talking about the lifetime of the mortgage over 30 years, then the total interest paid would be about $410,390.19. And if you are in 30% tax bracket, then you save: $410,390.19 x 30% =$123,117.06 over 30 years. This would have the same effect as reducing your interest rate from 8% compounded monthly to about 5.96% compounded monthly. So, obviously the mortgage would be less expensive.

Not sure if this answers your question.

Guest Apr 10, 2018
 #4
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How would I go about getting the 5977.36 savings in a year time? I answered this question already, but lost my notes on how I figured out the answer listed the 5977.36. I did learn a lot from your explanation, thanks!

Guest Apr 10, 2018
 #5
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You simply add up all the 12 interest payments listed in your table and you should get about $19,924.53. Then you would multiply this by 30% =$19,924.53 x 0.30 =$5,977.36.

Guest Apr 10, 2018
 #6
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Thank you very much!!

Guest Apr 10, 2018

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