Net after tax cost of borrowing
In Todd Ballenger’s book “Borrow Smart Retire Rich” he trademarks the term ‘EPR’ which stands for Effective Percentage Rate.
This concept it important in making decisions regarding how much a homeowner should borrow. Here is a simple explanation:
1) First, it’s important to understand that most homeowner’s are able to deduct the interest that they pay on their mortgage from their taxable income to determine their tax liability.
2) Therefore, a homeowner’s interest rate does not truly represent the actual cost of borrowing. For example, a person who has a mortgage with a 7.00% interest rate and finds themself in a 28% marginal tax bracket will have an EPR of 4.34% (7.00% * (1-.28%)=4.34%).
3) If cash-flow was not an issue this homeowner would be smart to borrow as much money as they could so long as the capital was used to earn a return in excess of 4.34%.
Posted: October 1st, 2008 under General Mortgage Info., Home Purchase, Personal Finance, Taxes.
Tags: EPR, net after tax cost of borrowing, tax deduction
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