Question

The following exercise is designed to be solved using technology such as calculators or computer spreadsheets.

Interest paid on a home mortgage is normally tax deductible. That is, you can subtract the total mortgage interest paid over the year in determining your taxable income. This is one advantage of buying a home. Suppose you take out a 30-year home mortgage for $250,000 at an APR of 8% compounded monthly. The mortgage payments details for the first year are given below.

Month	Initial balance	+Interest	?Payment	Final balance	Equity
1	$250,000.00	1,666.67	$1,834.41	$249,832.26	$167.74
2	$249,832.26	1,665.55	$1,834.41	$249,663.40	$336.60
3	$249,663.40	1,664.42	$1,834.41	$249,493.41	$506.59
4	$249,493.41	1,663.29	$1,834.41	$249,322.28	$677.72
5	$249,322.28	1,662.15	$1,834.41	$249,150.02	$849.98
6	$249,150.02	1,661.00	$1,834.41	$248,976.61	$1,023.39
7	$248,976.61	1,659.84	$1,834.41	$248,802.04	$1,197.96
8	$248,802.04	1,658.68	$1,834.41	$248,626.31	$1,373.69
9	$248,626.31	1,657.51	$1,834.41	$248,449.41	$1,550.59
10	$248,449.41	1,656.33	$1,834.41	$248,271.33	$1,728.67
11	$248,271.33	1,655.14	$1,834.41	$248,092.05	$1,907.95
12	$248,092.05	1,653.95	$1,834.41	$247,911.59	$2,088.41

Suppose that your marginal tax rate is 30%. What is your actual tax savings due to mortgage payments? (Round your answer to the nearest cent.)

Answer 1

As per the question, Interest paid for mortgage is tax deductible.

The Total mortgage is $250,000 @APR of 8% compounded monthly. The person is paying $1834.41 per month over 30 years which is equal to $660387.60. So the total interest paid by the person over 30 years is ($660387.60 - $250000 = $410387.60).

Total Tax which is saved for paying the interest = Total Interest * 30% which is equal to ($410387.60*30% = $123116.28).

So, the person has saved total of $123,116.3 in the period of 30 years.