So, now prior to 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 a hero, I'm http://cristianglum228.wpsuo.com/h1-style-clear-both-id-content-section-0-obtaining-a-home-loan-and-how-mortgages-work-fundamentals-explained-h1 not going to default on my home mortgage so I make that very first mortgage payment that Click to find out more we determined, that we calculated 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 first payment I now have $125,410 in equity. So, my equity has gone up by precisely $410. Now, you're most likely saying, hi, gee, I made a $2,000 payment, a roughly a $2,000 payment and my equity only increased by $410,000.
So, that very, in the start, your payment, your $2,000 payment is mostly interest. Just $410 of it is principal. But as you, and then you, and then, 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 mortgage again. This is my brand-new loan balance. And notice, currently by month 2, $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 an actual, sizable distinction.
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This is the interest and primary parts of our 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 exact, this is precisely our home mortgage payment, this $2,129. Now, on that really first month you saw that of my $2,100 just $400 of it, this is the $400, only $400 of it went to really pay down the principal, the actual loan quantity.
The majority of it went for the interest of the month. However as I start paying for 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 state 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 pay off the loan.
Now, the last thing I want to speak about in this video without making it too long is this concept of a interest tax reduction (how do adjustable rate mortgages work). So, a great deal of times you'll hear monetary planners or real estate agents tell you, hey, the advantage of buying your house is that it, it's, it has tax advantages, and it does.
Your interest, not your entire payment. Your interest is tax deductible, deductible. And I wish to be really 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 great deal 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 sized and smaller sized tax-deductible part of my real home mortgage payment. Out here the tax reduction is actually extremely little. As I'm getting prepared to settle my entire home loan and get the title of my house.
This doesn't suggest, let's state that, let's say in one year, let's state 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 say in year one, year one, I pay, I pay $10,000 in interest, $10,000 in interest. how do assumable mortgages work.
And, but let's say $10,000 went to interest. To state this deductible, and let's say before this, let's state 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 say I was paying roughly 35 percent on that $100,000.
Let's say, you understand, if I didn't have this home mortgage I would pay 35 percent taxes which would be about $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 mean that I can just take it from the $35,000 that I would have normally 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 state that I made $90,000 since I had the ability to subtract this, not straight 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 saved $3,500. I did not save $10,000. So, another way to believe about 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 earnings 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 do commercial mortgages work. So, if you were, uh, if there was some unique thing that you could in fact deduct it straight from your credit, from your taxes, that's a tax credit, tax credit.
And so, in this spreadsheet I just wish to show you that I actually determined in that month just how much of a tax reduction 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, roughly throughout 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 found this practical and I motivate you to go to that spreadsheet and, uh, play with the presumptions, only the assumptions in this brown color unless you actually understand what you're doing with the spreadsheet.
What I want to do with this video is discuss what a home loan is but I believe many of us have a least a basic sense of it. However even better than that actually enter into the numbers and understand a little bit of what you are really doing when you're paying a home mortgage, what it's comprised of and how much of it is interest versus just how much of it is really paying for the loan - how do reverse mortgages work?.