So, now before I pay any of my payments, rather of owing $375,000 at the end of the first month I owe $376,718. Now, I'm an excellent person, I'm not going to default on my home loan so I make that very first home mortgage payment that we calculated, that we determined right over here.
Now, this right here, what I, little asterisk here, this is my equity now. So, remember, I started with $125,000 of equity. After paying one loan balance, after, after my first payment I now have $125,410 in equity. So, my equity has actually gone up by precisely $410. Now, you're most likely stating, hi, gee, I made a $2,000 payment, an approximately a $2,000 payment and my equity just increased by $410,000.
So, that really, in the start, your payment, your $2,000 payment is mainly interest. Only $410 of it is primary. However as you, and after that you, and then, so as your loan balance decreases you're going to pay less interest here and so each of your payments are going to be more weighted towards principal and less weighted towards interest.
This is your new prepayment balance. I pay my mortgage once again. This is my brand-new loan balance. And notification, currently by month two, $2.00 more went to principal and $2.00 less went to interest. And throughout 360 months you're going to see that it's a real, substantial difference.
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This is the interest and primary parts of our home mortgage payment. So, this whole height right here, this is, let me scroll down a bit, this is by month. So, this whole height, if you discover, this is the precise, this is precisely our home mortgage payment, this $2,129. Now, on that very first month you saw that of my $2,100 only $400 of it, this is the $400, only $400 of it went to really pay down the principal, the actual loan quantity.
Most of it went for the interest of the month. But as I start paying down the loan, as the loan balance gets smaller and smaller, each of my payments, there's less interest to pay, let me do a much better color than that. There is less interest, let's say if we head out here, this is month 198, there, that last month there was less interest so more of my $2,100 actually goes to settle the loan.
Now, the last thing I desire to talk about in this video without making it too long is this idea of a interest tax reduction (what are reverse mortgages and how do they work). So, a great deal of times you'll hear financial organizers or realtors inform you, hey, the advantage of purchasing your home is that it, it's, it has tax advantages, and it does.
Your interest, not your whole payment. Your interest is tax deductible, deductible. And I wish to be extremely clear with what deductible methods. So, let's for example, talk about the interest costs. So, this entire time over thirty years I am paying $2,100 a month or $2,129.29 a month. Now, at the starting a lot of that is interest.
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That $1,700 is tax-deductible. Now, as we go further and even more every month I get a smaller and smaller tax-deductible part of my actual home Discover more here mortgage payment. Out here the tax deduction is actually really little. As I'm preparing to pay off my entire home loan and get the title of my house.
This does not mean, let's state that, let's state in one year, let's say in one year I paid, I don't know, I'm going to make up a number, I didn't determine it on the spreadsheet. Let's say in year one, year one, I pay, I pay $10,000 in interest, $10,000 in interest. how do escrow accounts work for mortgages.
And, however let's state $10,000 went to interest. To state this deductible, and let's state prior to this, let's say prior to this I was making $100,000. Let's put the loan aside, let's say I was making $100,000 a year and let's state I was paying roughly 35 percent on that $100,000.
Let's say, you understand, if I didn't have this home loan I would pay 35 percent taxes which would have to do with $35,000 in taxes for that year. Just, this is just a rough price quote. Now, when you say that $10,000 is tax-deductible, the interest is tax-deductible, that does not suggest that I can simply take it from the $35,000 that I would have usually owed and only paid $25,000.
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So, when I inform the Internal Revenue Service just how much did I make this year, rather of stating, I made $100,000 I say that I made $90,000 because I was able to subtract this, not directly from my taxes, I had the ability to subtract it from my earnings. So, now if I just made $90,000 and I, and this is I'm doing a gross oversimplification of how taxes really get calculated.
Let's get the calculator. So, 90 times.35 amounts to $31,500. So, this will amount to $31,500, put a comma here, $31,500. So, off of a $10,000 deduction, $10,000 of deductible interest, I basically conserved $3,500. I https://lorenzoaudg902.wordpress.com/2020/09/07/fascination-about-how-do-escrow-accounts-work-for-mortgages/ did not conserve $10,000. So, another way to think of it if I paid $10,000 interest, I'm going to, and my tax rate is 35 percent, I'm going to conserve 35 percent of this in actual taxes.
You're subtracting it from the income that you report to the IRS. If there's something that you might really take directly from your taxes, that's called a tax credit - how do assumable mortgages work. So, if you were, uh, if there was some special thing that you might really deduct it directly from your credit, from your taxes, that's a tax credit, tax credit.
And so, in this spreadsheet I simply wish to show you that I actually calculated because month just how much of a tax deduction do you get. So, for example, simply off of the first month you paid $1,700 in interest of your $2,100 home loan payment. So, 35 percent of that, and I got the 35 percent as one of your assumptions, 35 percent of $1,700.
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So, roughly throughout the first year I'm going to save about $7,000 in taxes, so that's absolutely nothing, absolutely nothing to sneeze at. Anyway, hopefully you found this useful and I motivate you to go to that spreadsheet and, uh, play with the assumptions, just the assumptions in this brown color unless you truly know what you're finishing with the spreadsheet.
What I desire to finish with this video is discuss what a home mortgage is but I think most of us have a least a basic sense of it. But even much better than that actually go into the numbers and understand a bit of what you are in fact doing when you're paying a mortgage, what it's comprised of and just how much of it is interest versus just how much of it is actually paying down the loan - how do buy to rent mortgages work.