Q: How come mortgage calculators don't take into account the tax deductibility of mortgage interest? For example, if I'm looking to refinance, the bottom line for me is whether I'd come out ahead on an after-tax basis.
A: Ultimately, taxes should factor into any refinancing decision. The problem with making this a direct input into a refinancing calculator is that there are so many variables at work.
Start with the fact that different people face different tax rates. Then there are also variations in eligibility to use deductions, depending on other aspects of your tax situation. Finally, there is the fact that the deductibility of mortgage interest will have a changing impact over the life of the mortgage, as the proportion of interest to principal in your monthly payments changes. This difference can be especially relevant to refinancing, because if you lengthen out the time remaining on your mortgage debt, it is likely to mean that interest is a greater portion of your monthly payment -- and therefore, more of that payment would be deductible.
Perhaps the best way to approach a refinancing decision on an after-tax basis would be to use a mortgage payment calculator, and then manually reduce the before-and-after payments by your estimate of the value of the tax deduction. Be sure to use an amortization schedule so you can see how the interest-to-principal ratio changes over time, which means the adjustment you make for the value of the tax deduction would also have to change over time.
Finally, in tallying up the impact of refinancing on your after-tax costs, be sure to look at it two ways. The first is on an immediate cash-flow basis: including tax implications, would you be paying less month by month after refinancing than before? However, you also should total this cost comparison over the remaining life of each loan, because the tax deductible portion of the payment is likely to be greatest in the first years and then diminish over time.