It’s just like every other tax deduction. Mortgage interest is tax deductible. A tax deduction reduces your taxable income. Hence it affects whatever your marginal rate is. So yes, your taxable income is reduced by your mortgage interest, thereby giving you back a percentage equal to your marginal bracket, hence the example I have.
Say you paid $6,000 of mortgage interest in a year. That reduces your taxable income by $6,000. If you’re into the 33% bracket, then that’s $1,980 you didn’t have to pay in taxes, hence you only lost 67% of your interest…so your “effective” rate is 67% of what it was.
…this is how tax deductions work, and why they’re so important when you’re in the high brackets.
Sorry I wasn't more clear. I understand how the deduction works, I was just wondering if you were given the deduction based on your highest tax bracket, or your marginal rate and it sounds like it's the marginal, which makes sense.
I was hoping you'd explain this a little more- "If you’re paying 15-yr principal amounts on a 30-yr interest rate, then divide the closing costs by the amount not spent in interest, and that’s how many months it takes you to break even."
How do I know how much I would have spent on interest??
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