Mortgage interest is tax deductible, meaning that you can subtract the amount of interest (not the total payment) from your annual taxable income. Suppose your marginal income tax rate is 25%. Use Excel to calculate the present value of all future tax savings for the option A in Question 1. The number you calculate is also called the tax shield value of debt. Assume that your personal fixed discount rate is 6%. Option A:
You have borrowed $450,000 to buy a house. The loan officer offers you three options:
A) 10-year fixed rate loan, with an annual rate of 4% and with fixed monthly installments