An actual money question: interest rates/taxes

[ohgillian]

This is when I need a pocket volenti.


My mortgage is at 3.75% and the interest is fully tax deductible. (Not sure if that phases out at some income level, but at any rate, it hasn't for us.)

My SL is at 3.25% and the interest is not tax deductible anymore (last year we got to deduct a small amount, but I think this year we will not get to deduct any).

My tax bracket is 28%; my effective tax rate last year was 11%.

Which loan has a higher effective interest rate? Is this even answerable?

[Deleted]

It depends on your itemized deductions. Did you itemize last year? Total? When did you get your mortgage?

[ohgillian]

Oct 15, 2012 10:10:23 GMT -5 d0ri said:

It depends on your itemized deductions. Did you itemized last year? Total? When did you get your mortgage?

Thanks.

Yes, we itemize.
Do you mean the total of the itemized deductions?
The mortgage is a new refi (Aug 2012)

[Deleted]

Yes, total itemized deductions. When I do this kind of analysis with ours, I consider the total itemized deductions, the total mortgage interest and the standard deduction.

[Deleted]

Here's a simplified version of how I would get the effective interest rate:

Assume:
$20,000 --- total itemized deduction
$11,900 --- standard deduction (married filing jointly)
$15,000 --- total mortgage interest paid

$2,268 --- tax savings due to the mortgage interest paid, ($20k-11.9k)x28%

3.18% --- effective interest rate (*simplified)... ($15k-2268)/(3.75%/$15k)

*simplified --- the calculation is not as simple as this, but close enough to get a reasonable number.

ETA: If total itemized deduction minus standard deduction is more than total mortgage interest paid, then tax savings will be (mortgage interest paid) x 28%

[ohgillian]

Oct 15, 2012 10:26:56 GMT -5 d0ri said:

Here's a simplified version of how I would get the effective interest rate:

Assume:
$20,000 --- total itemized deduction
$11,900 --- standard deduction (married filing jointly)
$15,000 --- total mortgage interest paid

$2,268 --- tax savings due to the mortgage interest paid, ($20k-11.9k)x28%

3.18% --- effective interest rate (*simplified)... ($15k-2268)/(3.75%/$15k)

*simplified --- the calculation is not as simple as this, but close enough to get a reasonable number.

ETA: If total itemized deduction minus standard deduction is more than total mortgage interest paid, then tax savings will be (mortgage interest paid) x 28%

Thanks so much -- this helps a lot. I have the numbers at home and will use this to run the math. Thanks!!