30 Year Fixed Loan at a Cost of One Point: 3.375*
Rates came back marginally primarily because of additional negative economic news out of Europe, as we predicted on Friday.
We frequently tout the tax benefits that result from shifting from renting to owning, and how those tax benefits offset one’s housing payment to the point where it sometimes is less (after taxes) than one’s rent payment.
What we do not tout is using tax benefits to rationalize an increase in one’s mortgage. Many borrowers with high incomes have the misconception that a larger mortgage or even a higher interest rate are good things because they result in a larger tax deduction.
While it is true that a larger mortgage or higher rates result in more interest to pay, and therefore a larger tax deduction, such things also result in a borrower paying more overall expenses (interest and taxes) no matter what.
Example: If borrowers in a combined tax bracket of 40% (state and federal) have a $100,000 mortgage at 4%, they can deduct approximately $4,000 of interest each year. This will result in tax savings of approximately $1,600 (40% of $4,000), reducing their net expenses (interest less taxes) to $2,400.
If these same borrowers double their mortgage to $200,000 (4% rate still), they will be able to deduct approximately $8,000 of interest from their income, doubling their tax savings to $3,200 (40% of $8,000). But, their “net expenses” (interest less taxes) goes up $4,800.
So yes, such borrowers get to deduct more taxes. But their interest expense increases by more than the tax savings.
This same logic applies to rates. Reducing your rate does not hurt borrowers because they lose some tax deductible interest; it helps them because their interest expense is reduced by more than the resulting reduction in tax savings.
*The above rate quote has the following assumptions: $400,000 Loan Amount; 20% down payment; credit score above 740; property is SFR; borrower has sufficient income to qualify; APR is approximately 0.20% higher than quoted rate for a $400,000 loan. Estimated closing costs affecting the APR include $4,595 for Origination and Processing Fees, $850 for other Lender Fees; $1,400 for Escrow Fees, and $1,000 for Prepaid Interest.
Call Jay Voorhees or Heejin Kim at (925) 855-4491
Real Estate Broker, CA Dept of Real Estate, DRE# 01524255, NMLS# 335646