The Wilmoths plan to purchase a house but want to determine the after-tax cost o

Question

The Wilmoths plan to purchase a house but want to determine the after-tax cost of financing its purchase. Given their projected taxable income, the Wilmoths are in the 28% Federal income tax bracket and the 8% state income tax bracket (i.e., an aggregate marginal tax bracket of 36%). The total cash outlay during the first year of ownership will be $ $28,000 ($2,800 principal payments, $25,200 qualified residence interest payments). If required, round your interim calculation to nearest dollar. As a result, the annual after-tax cost of financing the purchase of the home will be $

Explanation / Answer

Annual after tax cost of financing the purchase of home = installment – tax saving

Tax saving = 36% of interest amount

= 36% of 25,200

= $9,072

Installment amount = 28,000

Thus annual after tax cost of financing the purchase of home = 28,000 – 9,072

= $18,928

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