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True Interest Rate

True Interest Rate

Interest rates are always in flux; in fact, they change every 60 seconds. So, there is no real way to predict their path from one month to the next. Trying to catch the perfect rate should never deter you from owning your dream home. In fact, agents will often say, “Marry the house, date the rate.” This basically means don’t let interest rates deter you because you can always refinance. We have an inventory problem.

There is always a possibility that we could see another dip, and there could be a refi opportunity in that. If you find that perfect house, don’t wait to get it. Even if the rate isn’t what you’d hoped, there are always opportunities to modify or refinance. It’s a lot easier than people expect.

Don't Wait

In this market, the perfect home is harder to come by. If you find it, there’s no reason to let a short-term problem like interest rates deter you from your dream home. Refinancing in the future is an excellent option for buying real estate without remorse.

Interest rates are unpredictable, but under most circumstances, it is not advisable to wait for rates to go down. It may be helpful, instead, to examine the exact cost of a mortgage. It may surprise you to discover that the “net” cost of a mortgage is so much less than the face rate. Because interest payments are deductible for federal income tax purposes, the net cost of interest on a mortgage is lowered.

The actual amount depends upon the individual’s tax bracket.

The tax year 2022 adjustments described below generally apply to tax returns filed in 2023.

The tax items for the tax year 2022 of greatest interest to most taxpayers include the following dollar amounts:

  • The standard deduction for married couples filing jointly for the tax year 2022 rises to $25,900, up $800 from the prior year.
  • For single taxpayers and married individuals filing separately, the standard deduction rises to $12,950 for 2022, up $400, and for heads of households, the standard deduction will be $19,400 for tax year 2022, up $600.

The table below illustrates the net mortgage cost lessens as the tax bracket increases.

A buyer in the 22% bracket holding a 7% mortgage has a net interest cost of 5.46%, whereas the same note held by an owner in the 32% bracket has only a net cost of 4.76%.

 

A buyer in the 22% bracket holding a 7.5% mortgage has a net interest cost of 5.85%, whereas the same note held by an owner in the 32% bracket has only a net cost of 5.10%.


You can determine your net cost. First, determine your tax bracket by referring to your tax filing. Your tax advisor might assist you if necessary. Subtract your tax bracket number from 100 and multiply the resulting figure by the stated interest rate of the mortgage. The answer is your net cost. True Interest Rate.

As a tax deduction for federal income tax purposes, the interest payment on a mortgage is like a subsidy for the homeowner. You still pay the amount of money required for the loan, but a portion would have been paid to the IRS anyway. In essence, you “save” the amount of the deduction in taxes and supplement your mortgage payment instead. Just one more reason to consider making that home purchase now rather than wait for an improvement in the interest rates.

If you have difficulty figuring out your net rate or determining what might be your net rate if you purchase, give us a call at FRB Mortgage. In the meantime, the chart below may be helpful.

Tax Bracket Net Cost @6.5% Net Cost @7.0% Net Cost @7.5% Net Cost @8.0%
12% 5.72 6.16 6.6 7.04
22% 5.07 5.46 5.85 6.24
24% 4.94 5.32 5.7 6.08
32% 4.42 4.76 5.1 5.44
35% 4.23 4.55 4.87 5.2
37% 4.1 4.41 4.72 5.04

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