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%.