So, now before I pay any of my payments, instead of owing $375,000 at the end of the very 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 first mortgage payment that we computed, that we determined right over here.
Now, this right here, what I, little asterisk here, this is my equity now. So, remember, I began with $125,000 of equity. After paying one loan balance, after, after my very first payment I now have $125,410 in equity. So, my equity has actually gone up by precisely $410. Now, you're probably saying, hey, gee, I made a $2,000 payment, an approximately a $2,000 payment and my equity just increased by $410,000.
So, that very, in the start, your payment, your $2,000 payment is primarily interest. Only $410 of it is primary. But as you, and then you, and then, so as your loan balance decreases you're going to pay less interest here therefore 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 notice, currently by month 2, $2.00 more went to primary and $2.00 less went to interest. And throughout 360 months you're going to see that it's a real, sizable difference.
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This is the interest and primary parts of our home loan payment. So, this entire height right here, this is, let me scroll down a bit, this is by month. So, this whole height, if you see, this is the specific, this is exactly our home loan payment, this $2,129. Now, on that really first month you saw that of my $2,100 only $400 of it, this is the $400, only $400 of it went to actually pay down the principal, the actual loan amount.
Many of it opted for the interest of the month. But as I start paying down the loan, as the loan balance gets smaller and smaller sized, each of my payments, there's less interest to pay, let me do a better color than that. There is less interest, let's say if we head out here, this is month 198, over there, that last month there was less interest so more of my $2,100 really goes to settle the loan.
Now, the last thing I wish to talk about in this video without making it too long is this concept of a interest tax reduction https://karanaujlamusicbu4h4.wixsite.com/lukaschov190/post/h1-styleclearboth-idcontentsection0an-unbiased-view-of-how-do-mortgages-work-in-canadah1 (how do reverse mortgages work). So, a great deal of times you'll hear financial planners or realtors tell you, hey, the advantage of purchasing your home is that it, it's, it has tax benefits, and it does.
Your interest, not your entire payment. Your interest is tax deductible, deductible. And I wish to be very clear with what deductible methods. So, let's for circumstances, talk about the interest fees. So, this whole time over thirty years I am paying $2,100 a month or $2,129.29 a month. Now, at the beginning a lot of that is interest.
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That $1,700 is tax-deductible. Now, as we go further and further each month I get a smaller and smaller sized tax-deductible portion of my real home loan payment. Out here the tax deduction is actually extremely little. As I'm preparing to pay off my entire mortgage and get the title of my home.
This does not suggest, let's say that, let's state in one year, let's say in one year I paid, I do not understand, I'm going to make up a number, I didn't compute it on the spreadsheet. Let's state in year one, year one, I pay, I pay $10,000 in interest, $10,000 in interest. how do reverse mortgages work?.
And, but let's state $10,000 went to interest. To state this deductible, and let's say prior to this, let's say prior to this I was making $100,000. Let's put the loan aside, let's state 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 be about $35,000 in taxes for that year. Just, this is just a rough quote. Now, when you say that $10,000 is tax-deductible, the interest is tax-deductible, that does not indicate that I can simply take westlake financial florida it from the $35,000 that I would have normally owed and only paid $25,000.
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So, when I tell the Internal Revenue Service how much did I make this year, instead of saying, I made $100,000 I say that I made $90,000 since I had the ability to subtract this, not directly from my taxes, I was able to deduct it from my income. So, now if I only made $90,000 and I, and this is I'm doing a gross oversimplification of how taxes actually get calculated.
Let's get the calculator. So, 90 times.35 amounts to $31,500. So, this will be equivalent 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 did not save $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 real taxes.
You're subtracting it from the income that you report to the Internal Revenue Service. If there's something that you could in fact take directly from your taxes, that's called a tax credit - how do second mortgages work. So, if you were, uh, if there was some unique thing that you might in fact deduct it directly from your credit, from your taxes, that's a tax credit, tax credit.
Therefore, in this spreadsheet I just desire to reveal you that I really calculated because month just how much of a tax reduction do you get. So, for example, just off of the very first month you paid $1,700 in interest of your $2,100 home mortgage payment. So, 35 percent of that, and I got the 35 percent as one of your presumptions, 35 percent of $1,700.
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So, approximately over the course of the first year I'm going to conserve about $7,000 in taxes, so that's absolutely nothing, nothing to sneeze at. Anyway, hopefully you discovered this handy and I encourage you to go to that spreadsheet and, uh, play with the presumptions, only the presumptions in this brown color unless you actually know what you're doing with the spreadsheet.
What I wish to do with this video is discuss what a home loan is however I believe most of us have a least a general sense of it. But even better than that really go into the numbers and comprehend a little bit of what you are actually doing when you're paying a mortgage, what it's made up of and how much of it is interest versus how much of it is really paying down the loan - how to reverse mortgages work.