In Mortgage Equation, Tax Deductions Count for a Lot

By Benny L. Kass
Saturday, January 19, 2008

Third in a series of columns

"I'm living so far beyond my income that we may almost be said to be living apart."

-- E.E. Cummings

The tax-deductibility of mortgage interest is one of the big benefits of homeownership, and it can affect your financial decisions.

Take, for example, your choice of a mortgage. Let's say you have signed a contract to buy a house for $475,000. You have been saving money for a long time and plan to put down 20 percent ($95,000) and get a loan for the remaining $380,000.

You shop around and find that one lender will offer you a 30-year, fixed-rate loan at 6.5 percent. The monthly payments for principal and interest will be $2,401.87.

Another lender has offered you a five-year, adjustable-rate mortgage starting at 5.75 percent. This will require a monthly payment of $2,217.59 for principal and interest.

The difference is $184.28 per month, or more than $2,200 per year. That can make the adjustable-rate mortgage seem attractive, even though you face the possibility of much higher payments five years from now.

But how do those payments compare after taxes?

Assume that you are married and file a joint return and that your taxable income is between $128,500 and $195,800. That means you are in the 28 percent federal income tax bracket.

Oversimplified, that means that every dollar you pay in mortgage interest can be reduced by 28 percent.

Doing the math shows that the post-tax difference between the two mortgages is $132.69 per month, or only about $1,592 per year. (In the early years of a mortgage, just about the entire payment goes to interest, so that simplifies the math.)

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