Here is the concept for understanding the mortgage interest deduction. AGI determines tax liability. Mortgage interest payment can reduce AGI. Thus mortgage interest payment can reduce tax liability.
Mortgage interest can be deducted from your adjusted gross income (AGI). For instance, if a person's AGI is $50,000 and their annual mortgage interest payment is $4,000, that person's AGI is reduced by $4,000 to $46,000. The marginal tax rate for $46,000 is 25%. Thus, this person would save $1,000, or 25% of $4,000, in tax liability due to their mortgage interest deduction.
Tax rates are progressive. A single filer pays 10% on the first $8,925, 15% on $8,925 to $36,250, and so on. See the tax rate chart for 2013, below. Your tax savings depends on the AGI reduction and the total AGI. Hope this helps.
Rate Single Filers Married Joint Filers Head of Household Filers
10% $0 to $8,925 $0 to $17,850 $0 to $12,750
15% $8,925 to $36,250 $17,850 to $72,500 $12,750 to $48,600
25% $36,250 to $87,850 $72,500 to $146,400 $48,600 to $125,450
28% $87,850 to $183,250 $146,400 to $223,050 $125,450 to $203,150
33% $183,250 to $398,350 $223,050 to $398,350 $203,150 to $398,350
35% $398,350 to $400,000 $398,350 to $450,000 $398,350 to $425,000
39.6% $400,000 and up $450,000 and up $425,000 and up... more
Your first step is to get in front of a reputable lender, who can take a peek at your financial status (pre-qualification), and let you know what price range is best suited for your income and debt ratios. They will also be able to tell you if there is anything that might hinder a home purchase, and help you avoid any surprises in your credit history that you might not even be aware of. Once you have cleared this all important hurdle, the next step is to find areas of town that you would like to live, and finally, start looking at properties in those areas that fall into your price range. While you are getting pre-qualified, you can customize a search on our website, tailor it to your needs & desires, and it will even notify you when new matches come onto the market. Happy hunting!
Brian & Dawn Fossa