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Mortgage Intrest Rate
Old 01-26-2006, 11:13 PM   #1
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Mortgage Intrest Rate

After claiming the interest on a home mortgage what is the real interest rate you are paying. I am locked in at 6.25 for 30 years but what is the actual interest rate after figuring the amount paid and deducted from income tax? Or doe that vary? I am sure there is a better way to explain it but I think you know what I am getting at.

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Re: Mortgage Intrest Rate
Old 01-27-2006, 12:07 AM   #2
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Re: Mortgage Intrest Rate

The actual interest rate is 6.25%.

You might be asking for the effective interest rate.* Here is one answer:* Take your marginal tax rate as a decimal, subtract from 1, multiply by your actual interest rate.* Example: Your marginal tax rate is 15%, so (1 - 0.15) * 6.25 = 5.3125.

The reality is that the first $10,000 of your itemized deductions (if married filing jointly) are really covered by the standard deduction, so if you do not have other itemized deductions that covers that first $10,000 then you are fooling yourself.
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Re: Mortgage Intrest Rate
Old 01-27-2006, 09:35 AM   #3
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Re: Mortgage Intrest Rate

Quote:
Here is one answer: Take your marginal tax rate as a decimal, subtract from 1, multiply by your actual interest rate. Example: Your marginal tax rate is 15%, so (1 - 0.15) * 6.25 = 5.3125.
Next you can subtract inflation since the dollars you pay the loan with will be devalued. So if 3% is used as an "average" annual inflation, you're really paying 2.3125% for the mortgage $$ ... pretty good deal!

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Re: Mortgage Intrest Rate
Old 01-27-2006, 12:21 PM   #4
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Re: Mortgage Intrest Rate

Quote:
Originally Posted by tryan
Next you can subtract inflation since the dollars you pay the loan with will be devalued. So if 3% is used as an "average" annual inflation, you're really paying 2.3125% for the mortgage $$ ... pretty good deal!
Yep, this inflation bit is one that folks who pre-pay their low interest mortgage just don't seem to get a handle on.

We have a 4.875% fixed rate mortgage. A couple years ago when the best savings interest rate was around 3% some people said, "Pay your mortgage off because that's a guaranteed 4.875% when all you get at ING is 3%." A couple years later, one can get 5% CDs, 6%+ I-bonds, and if you can take on more risk over the long term somewhat better.

If we paid off our mortgage, we would have used expensive present day dollars instead of future inflation-ravaged cheap dollars. Instead, the bank practically pays us to live in our home. Now that's peace of mind.
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Re: Mortgage Intrest Rate
Old 01-27-2006, 01:27 PM   #5
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Re: Mortgage Intrest Rate

Quote:
We have a 4.875% fixed rate mortgage.
We have the same fixed rate on a 15 year loan.* FIRE'd in Oct and can't bring myself to pay it off ... and interest rates keep rising.

I can pay it off any time ... but - probably - can not get a decent mortgage rate again given that rates have risen and I would show no employment.*

Edit - clarity
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Re: Mortgage Intrest Rate
Old 01-27-2006, 01:40 PM   #6
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Re: Mortgage Intrest Rate

Quote:
Originally Posted by tryan
We have the same fixed rate on a 15 year loan.* FIRE'd in Oct and can't bring myself to pay it off ... and interest rates keep rising.

I reason that I can pay it off any time ... but - probably - can not get a decent mortgage rate again given that rates have risen and I would show no employment.*
I guess I am missing something here. Why would you care about a future mortgage if you paid off yours now? You can't usually transfer an existing morgtgage to a different home so why the concern about a new one? I am not trying to stir the pot, just wondering why that has any impact on paying you mortgage off early.
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Re: Mortgage Intrest Rate
Old 01-27-2006, 02:09 PM   #7
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Re: Mortgage Intrest Rate

Certainly don't plan to need another mortgage. But before I FIRE'd I grabbed a couple HELOCs on rentals. Saw this as a safety net. The name of the game is cash-flow. Keeping the mortgage $$ invested (and having the HELOCs) helps win the cash-flow game. Adding HELOCs - or mortgages - as a retiree is probably an exercise in self abuse.
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Re: Mortgage Intrest Rate
Old 01-27-2006, 05:17 PM   #8
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Re: Mortgage Intrest Rate

Quote:
Originally Posted by SteveR
I guess I am missing something here.* Why would you care about a future mortgage if you paid off yours now?* You can't usually transfer an existing morgtgage to a different home so why the concern about a new one?* I am not trying to stir the pot, just wondering why that has any impact on paying you mortgage off early.*
I didn't get it either.

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Re: Mortgage Intrest Rate
Old 01-27-2006, 07:56 PM   #9
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Re: Mortgage Intrest Rate

Quote:
Originally Posted by tryan
Adding HELOCs - or mortgages - as a retiree is probably an exercise in self abuse.
With today's interest rates & loan choices, the banks will beat a path to your door whether you're working OR retired. As long as you have the cash flow or the assets they'll work with you regardless of your employment (or lack thereof).
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Re: Mortgage Intrest Rate
Old 01-27-2006, 08:01 PM   #10
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Re: Mortgage Intrest Rate

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Originally Posted by Nords
With today's interest rates & loan choices, the banks will beat a path to your door whether you're working OR retired.* As long as you have the cash flow or the assets they'll work with you regardless of your employment (or lack thereof).
Yeah, money is still loose loose loose. Never saw the like.

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Re: Mortgage Intrest Rate
Old 01-28-2006, 12:08 AM   #11
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Re: Mortgage Intrest Rate

Quote:
Originally Posted by LOL!
Yep, this inflation bit is one that folks who pre-pay their low interest mortgage just don't seem to get a handle on.

We have a 4.875% fixed rate mortgage. A couple years ago when the best savings interest rate was around 3% some people said, "Pay your mortgage off because that's a guaranteed 4.875% when all you get at ING is 3%." A couple years later, one can get 5% CDs, 6%+ I-bonds, and if you can take on more risk over the long term somewhat better.

If we paid off our mortgage, we would have used expensive present day dollars instead of future inflation-ravaged cheap dollars. Instead, the bank practically pays us to live in our home. Now that's peace of mind.
If you are going to inflation adjust the mortgage rate , you must also look at the real rate (i.e. after inflation) on the investment alternative. I personally choose to keep my mortgage outstanding as my 'real' mortgage rate is a fairly low hurdle.

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Re: Mortgage Intrest Rate
Old 01-28-2006, 05:40 PM   #12
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Re: Mortgage Intrest Rate

Quote:
With today's interest rates & loan choices, the banks will beat a path to your door whether you're working OR retired.
I hear ya ... but I don't expect the rate to be anywhere near 4.875% (fixed).
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