Question

A home equity line of credit (HELOC) is, loosely speaking, like a credit card for your home. You can borrow money by drawing down on the line of credit. But, because the borrowed money is for the purpose of your home, the interest is tax-deductible meaning that you can deduct the interest paid on this money from your income to reduce your taxes. If the current annual interest rate on a HELOC is 3.85\%3.85% and your tax rate is 32\2%, what is the after-tax interest rate you will pay on any borrowings under the HELOC

Answer 1

2.618%

Step-by-step explanation:

Current annual interest rate on a HELOC = 3.85%

Tax rate = 32%

After-tax interest rate = Before tax interest rate * (1 - Tax rate)

After-tax interest rate = 3.85% * (1 - 0.32)

After-tax interest rate = 0.0385 * 0.68

After-tax interest rate = 0.02618

After-tax interest rate = 2.618%

So, the after-tax interest rate you will pay on any borrowings under the HELOC is 2.618%.