One of the most important financial benefits of owning a home is the ability to itemize and deduct mortgage interest and property taxes (as well as at least one more year for Private Mortgage Insurance (PMI)) when calculating your federal income taxes.
Many home buyers often ask what impact this will have to them and how to calculate the benefit. Here is a quick example:
$ 20,000 = Mortgage interest paid (a loan of $400,000 for 30 years, at 5 percent, using year-one interest)
$ 5,280 = Property taxes (at 11 percent on $480,000 assessed value)
$25,280 = Total deduction
Then, multiply your total deduction by your tax rate.
For example, at a 28 percent tax rate: 25,280 x 0.28 = $7,078.40
$ 7,078.40 = Amount you have lowered your federal income tax (at 28 percent tax rate)
Note: Mortgage interest may not be deductible on loans over $1.1 million. In addition, deductions are decreased when total income reaches a certain level. Illustrative example only - check with your tax adviser for your specific situation.