A formula for the after‐tax APR for home mortgages

Purpose – The purpose of this paper is to provide a simple formula for determining a borrower's APR for mortgage loans after including the effects of mortgage interest tax deductions.Design/methodology/approach – This formula is derived by adjusting the APR provided by the lender for the length of the mortgage, the amount of discount points, the mortgage interest rate, and the borrower's tax rate.Findings – From this formula, it is found that the tax‐adjusted APR is not only lower but also more informative than the traditional APR.Research limitations/implications – The tax‐deductible items of a mortgage loan used in this formula for after‐tax APR are based on those stipulated under US tax law. However, this formula can easily be adapted to other internal rate of return methods such as the annual effective rate of return (AER). In addition, further research is needed to develop a formula when a mortgage loan is the result of a refinance. Under this situation, mortgage discount points are no longer tax‐ded...