The Down Payment Tax Brackets and Interest Payments
Plain and simple, your down payment does not affect If you’re going to make sound and knowledgeable
your appreciation one bit. Rather, your down pay- financial decisions, you’ll need to know which tax
ment directly impacts your cash flow. Let’s take for bracket you fall into. This is because your tax bracket
example that $400,000 property again. At 20 percent, will determine your effective percentage rate. For
the down payment is $80,000. If the borrower were to example, if you are borrowing at 7 percent, and you
put zero down and appreciation stayed at 4 percent are in a 37.5 percent tax bracket, 37.5 percent of your
average over the long term, the house would still be interest rate – or 2.625 percent, in this case – is going
worth roughly $1.3 million in 30 years. However, that to be paid by the government.
same $80,000 at 7 percent interest would result in
The way to calculate this rate is to multiply your in-
about $292 per month. If the borrower puts $80,000
terest rate by your tax bracket. In this case, we mul-
down, the mortgage payment is reduced by $292 per
tiply 7 (percent interest) by .375 (for 37.5 percent),
month. In other words, your down payment cash is an
which comes out to 2.635 (percent interest). When
investable asset. That same $80,000, if not put into the
you subtract the amount of interest paid by the gov-
house, has a cost of $292 per month. These are con-
ernment by the original interest rate, you’ll get your
cepts you’ll want to understand when considering the
effective percentage rate, something very important
size of your down payment.
to understand when determining when and where to
If you do choose to utilize your liquid assets as a down borrow and invest.
payment, remember that there are only three ways to
A qualified loan professional, a Mortgage Planner, can
lose wealth in a house: depreciation, foreclosure and
help you to implement a plan for the highest and best
lawsuits. While you’ll want to discuss the legal options
use of your money, one that utilizes your house to
to protect against loss of wealth due to lawsuits or de-
put you on the path to financial security. By learning,
preciation with a qualified professional, your loan of-
understanding and employing these concepts, you’ll
ficer can assist in protecting you against potential loss
be on your way to earning interest rather than simply
due to foreclosure. By putting a liquidity plan in place
paying it.
prior to necessity, you will safeguard your down pay-
ment and additional equity you’ve accumulated. Your Author: Steven Marshall is the CEO of Mortgage Planner
loan officer can do this by securing a HELOC (home and the author of “The Millionaire Mortgage Planner.”
equity line of credit) right away – even before you’ll
ever need it – so that you’ll have access to your equity
and will therefore be protected against total loss.
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