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 a hero, I'm not going to default on my home loan so I make that very first mortgage payment that we determined, that we determined right over here.
Now, this right here, what I, little asterisk here, this is my equity now. So, keep in mind, I started 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 increased by precisely $410. Now, you're probably saying, hello, gee, I made a $2,000 payment, a roughly a $2,000 payment and my equity just increased by $410,000.
So, that very, in the beginning, your payment, your $2,000 payment is mostly interest. Only $410 of it is principal. However 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 home loan once again. This is my new loan balance. And notification, currently by month two, $2.00 more went to primary and $2.00 less went to interest. And throughout 360 months you're visiting that it's a real, substantial distinction.
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This is the interest and primary portions of our mortgage payment. So, this whole height right here, this is, let me scroll down a little bit, this is by month. So, this entire height, if you observe, this is the exact, this is precisely our home mortgage payment, this $2,129. Now, on that very first month you saw that of my $2,100 just $400 of it, this is the $400, only $400 of it went to actually pay down the principal, the actual loan quantity.
Most of it chose the interest of the month. But as I start paying down the loan, as the loan balance gets smaller sized 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 go out here, this is month 198, 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 speak about in this video without making it too long is this idea of a interest tax reduction (how do business mortgages work). So, a great deal of times you'll hear monetary planners or real estate agents inform you, hey, the benefit of buying 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 desire to be very clear with what deductible methods. So, let's for example, speak about the interest charges. So, this whole time over thirty years I am paying $2,100 a month or $2,129.29 a month. Now, at the starting a great deal 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 sized and smaller tax-deductible portion of my actual home mortgage payment. Out here the tax reduction is really really small. As I'm preparing to pay off my whole mortgage and get the title of my home.
This doesn't indicate, let's state that, let's say in one year, let's state in one year I paid, I do not know, I'm going to comprise 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 escrow accounts work for mortgages.
And, but let's state $10,000 went to interest. To say this deductible, and let's say prior to this, let's https://simonnogb339.tumblr.com/post/628358494510333952/h1-style-clearboth-id-content-section-0-how say before 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 state, you know, 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. Simply, this is just a rough 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 tell the IRS how much did I make this year, rather of saying, I made $100,000 I state that I made $90,000 because I was able to subtract this, not straight from my taxes, I was able to subtract 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 determined.
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 essentially saved $3,500. I 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 save 35 percent of this in actual taxes.
You're deducting it from the income that you report to the Internal Revenue Service. If there's something that you might really take straight from your taxes, that's called a tax credit - how to reverse mortgages work. So, if you were, uh, if there was some special thing that you could actually deduct it directly from your credit, from your taxes, that's a tax credit, tax credit.
And so, in this spreadsheet I just wish to reveal you that I actually calculated in that month just how much of a tax deduction do you get. So, for instance, just off of the very first month you paid $1,700 in interest of View website 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 very 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 helpful and I motivate you to go to that spreadsheet and, uh, have fun with the assumptions, just the presumptions in this brown color unless you truly understand what you're doing with the spreadsheet.
What I desire to finish with this video is explain what a home mortgage is but I think the majority of us have a least a basic sense of it. However even much better than that really enter into the numbers and comprehend a bit of what you are in fact doing when you're paying a mortgage, what it's made up of and just how much of it is interest versus just how much of it is actually paying for the loan - how do reverse mortgages work?.