# When is a 5.5 Percent Mortgage Rate Really a 3.96 Percent Rate?

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It’s income tax season again.   OK – W2 season, as many here in Winter Haven, Florida will wait until that fateful April deadline to file their taxes.   One of the bright spots we home owners get to look forward to around this time of year are the deductions we get to claim.

However, like most IRS-related items, the exact nature of the mortgage interest and real estate tax deductions tends to be a bit foggy.   So, as your friendly neighborhood Florida home loans specialist, allow me to clear things up a bit:

Homeowners are entitled to two basic home-related tax deductions — the first is for the amount of annual mortgage interest paid, and the second is for real estate tax bills paid.   This said, not all Winter Haven area homeowners are eligible for these deductions.

Two key things that might exclude you from taking these deductions are total amount you borrowed to buy your Winter Have, FL area home and whether the home is classified as a primary or secondary residence.

The official IRS publication relating to these two deductions is filled with notes and explanations but, in general, you can calculate your approximate mortgage interest tax deduction as follows:

1. Add up your annual mortgage interest and real estate taxes paid
2. Find your tax rate on the IRS tax bracket schedule
3. Multiple your tax rate by the sum (the total from your addition problem) in step 1

This is a very simple explanation, but it will suffice for a rough estimate.   Seek out one of many online mortgage calculators to assist you in this process.

Here’s an example for you to review:

Henry homeowner paid a total of \$25,000 in combined mortgage interest and real estate taxes for 2008.   He looked up his tax bracket using the IRS tax rate guide and determined that he is in the 28% tax bracket.   Doing the math a prescribed above, he calculated his approximate IRS home-related tax deduction to be \$7,000.

The availability of mortgage interest tax deductions is one reason why loan officers make reference to “after-tax mortgage rates.”   An after-tax mortgage rate is the effective interest rate, post-tax code, and can be calculated using the formula below:

### (After-Tax Mortgage Rate) = (Mortgage Rate) * (1 – Marginal Tax Rate)

A homeowner with a 5.5% mortgage rate will therefore have an after-tax mortgage rate of 3.96%.

Because not every homeowner is eligible for home-related deductions, and because not every homeowner should claim them, talk with your personal accountant before making any tax-related decisions.

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