Patrick is a recently divorced single father and will be filing head of household and itemizes. As a result of the divorce from his husband he will need to refinance the mortgage on the home. The bank has offered Patrick the option of paying points on the mortgage in order to receive an annual interest rate reduction. Patrick will also make interest-only payments for the first four years. Patrick has asked you to produce a calculation to assist in determining whether or not paying points makes the most financial sense from a tax perspective. Required: 1. Complete the analysis using formulas and references to the data provided in E14:E20. (HINT: Annualize the break-even years using 365 days to determine the Break-Even Date) Mortgage Amount Proposed Points Net After-Tax Cost of Points Annual Interest Rate Savings Less: Lost tax benefit of higher interest Net After-Tax Savings of Lower Interest Point Amortization Tax Benefit Annual After-Tax Benefit of Points Break-Even Point of Points: Break-Even Date: Years Mortgage: $ Points: 240,000 4 Rate with Points: 4.75% Rate without Points: Mortgage Length (Years): 5.25% 30 Marginal Tax Rate: 24.00% Start Date: 4/1/2023
Patrick is a recently divorced single father and will be filing head of household and itemizes. As a result of the divorce from his husband he will need to refinance the mortgage on the home. The bank has offered Patrick the option of paying points on the mortgage in order to receive an annual interest rate reduction. Patrick will also make interest-only payments for the first four years. Patrick has asked you to produce a calculation to assist in determining whether or not paying points makes the most financial sense from a tax perspective. Required: 1. Complete the analysis using formulas and references to the data provided in E14:E20. (HINT: Annualize the break-even years using 365 days to determine the Break-Even Date) Mortgage Amount Proposed Points Net After-Tax Cost of Points Annual Interest Rate Savings Less: Lost tax benefit of higher interest Net After-Tax Savings of Lower Interest Point Amortization Tax Benefit Annual After-Tax Benefit of Points Break-Even Point of Points: Break-Even Date: Years Mortgage: $ Points: 240,000 4 Rate with Points: 4.75% Rate without Points: Mortgage Length (Years): 5.25% 30 Marginal Tax Rate: 24.00% Start Date: 4/1/2023
Chapter2: Income Tax Concepts
Section: Chapter Questions
Problem 37P
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1
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Patrick is a recently divorced single father and will be filing head of household and itemizes. As a result of the divorce from his husband he will need to
3 refinance the mortgage on the home. The bank has offered Patrick the option of paying points on the mortgage in order to receive an annual interest rate
4
5
reduction. Patrick will also make interest-only payments for the first four years. Patrick has asked you to produce a calculation to assist in determining
whether or not paying points makes the most financial sense from a tax perspective.
6
7
8 Required:
10
1. Complete the analysis using formulas and references to the data provided in E14:E20.
11 (HINT: Annualize the break-even years using 365 days to determine the Break-Even Date)
12
13
14 Mortgage Amount
15 Proposed Points
16
Net After-Tax Cost of Points
17 Annual Interest Rate Savings
18
Less: Lost tax benefit of higher interest
19 Net After-Tax Savings of Lower Interest
20 Point Amortization Tax Benefit
21
Annual After-Tax Benefit of Points
22
Break-Even Point of Points:
Years
23
Break-Even Date:
24
Mortgage: $
Points:
240,000
4
Rate with Points:
Rate without Points:
Mortgage Length (Years):
4.75%
5.25%
30
Marginal Tax Rate:
Start Date:
24.00%
4/1/2023
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