So, now prior to I pay any of my payments, instead of owing $375,000 at the end of the first month I owe $376,718. Now, I'm a hero, I'm not going to default on my home mortgage so I make that first mortgage payment that we calculated, that we computed 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 very first payment I now have $125,410 in equity. So, my equity has increased by exactly $410. Now, you're most likely saying, hello, gee, I made a $2,000 payment, a roughly a $2,000 payment and my equity only went up by $410,000.
So, that extremely, in the start, your payment, your $2,000 payment is mostly interest. Just $410 of it is primary. However as you, and then you, and after that, so as your loan balance goes down 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 brand-new prepayment balance. I pay my home mortgage again. This is my new loan balance. And notification, already 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, substantial distinction.
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This is the interest and principal portions of our home mortgage payment. So, this whole height right here, this is, let me scroll down a little bit, this is by month. So, this whole height, if you observe, this is the precise, 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, just $400 of it went to actually pay down the principal, the actual loan amount.
The majority of it went for the interest of the month. But as I begin paying for the loan, as the loan balance gets smaller sized and smaller, 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 pay off the loan.
Now, the last thing I wish to speak about in this video without making it too long is this concept of a interest tax deduction (how do reverse mortgages work example). So, a great deal of times you'll hear monetary coordinators or real estate agents inform you, hey, the advantage of buying your house is that it, it's, it has tax benefits, and it does.
Your interest, not your whole payment. Your interest is tax deductible, deductible. And I want to be very clear with what deductible methods. So, let's for example, speak about the interest charges. So, this whole time over 30 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 even more and even more monthly I get a smaller and smaller sized tax-deductible portion of my actual home loan payment. Out here the tax reduction is really very small. As I'm getting all set to settle my entire home loan and get the title of my house.
This does not suggest, 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 state in year one, year one, I pay, I pay $10,000 in interest, $10,000 in interest. reverse mortgages how they work.
And, however let's state $10,000 went to interest. To state this deductible, and let's say before this, let's state before 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 say I was paying approximately 35 percent on that $100,000.
Let's state, you understand, if I didn't have this mortgage I would pay 35 percent taxes which would have to do with $35,000 in taxes for that year. Simply, this is simply a rough price quote. Now, when you state that $10,000 is tax-deductible, the interest is tax-deductible, that does not indicate that I can just take it from the $35,000 that I would have normally owed and just paid $25,000.
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So, when I inform the Internal Revenue Service how much did I make this year, instead of saying, I made $100,000 I state that I made $90,000 due to the fact that I had the ability to deduct this, not directly from my taxes, I had the ability to deduct it from my earnings. So, now if I only made $90,000 and I, and this is I'm doing a gross oversimplification of how taxes in fact get computed.
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 reduction, $10,000 of deductible interest, I essentially saved $3,500. I did not save $10,000. So, another way to consider it if I paid $10,000 interest, I'm going to, https://eduardozkmw626.shutterfly.com/29 and my tax rate is 35 percent, I'm going to save 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 straight from your taxes, that's called a tax credit - how do home mortgages work. So, if you were, uh, if there was some special thing that you could in fact subtract it straight 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 computed in that month how much of a tax deduction do you get. So, for instance, simply off of the very first month you paid $1,700 in interest of your $2,100 mortgage 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, approximately over the course of the first year I'm going to westlake financial services careers conserve about $7,000 in taxes, so that's absolutely nothing, absolutely nothing to sneeze at. Anyway, hopefully you found this practical and I motivate you to go to that spreadsheet and, uh, play with the presumptions, just the presumptions in this brown color unless you truly know what you're finishing with the spreadsheet.
What I want to make with this video is explain what a home loan is but I believe many of us have a least a basic sense of it. But even much better than that actually enter into the numbers and understand a 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 just how much of it is in fact paying for the loan - how do commercial mortgages work.