So, now before I pay any of my payments, rather of owing $375,000 at the end of the very first month I owe $376,718. Now, I'm a great person, I'm not going to default on my home mortgage so I make that very first home loan payment that we determined, that we calculated 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 increased by exactly $410. Now, you're probably stating, hi, gee, I made a $2,000 payment, a roughly a $2,000 payment and my equity only increased by $410,000.
So, that extremely, in the start, your payment, your $2,000 payment is primarily 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 and so 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 loan again. This is my new loan balance. And notification, already by month two, $2.00 more went to primary and $2.00 less went to interest. And over the course of 360 months you're going to see that it's an actual, substantial distinction.
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This is the interest and primary portions 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 discover, this is the exact, this is precisely our mortgage payment, this $2,129. Now, on that extremely first month you saw that of my $2,100 only $400 of it, this is the $400, just $400 of it went to really pay down the principal, the real loan quantity.
Most of it chose the interest of the month. But 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 much 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 in fact 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 idea of a interest tax deduction (reverse mortgages Look at more info how they work). So, a lot of times you'll hear monetary organizers or realtors inform you, hey, the advantage of buying your home is that it, it's, it has tax advantages, and it does.
Your interest, not https://charlietlcy968.webs.com/apps/blog/show/49033485-lt-h1-style-quot-clear-both-quot-id-quot-content-section-0-quot-gt-facts-about-how-do-mortgages-financie-work-uncovered-lt-h1-gt- 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, 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 great deal of that is interest.
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That $1,700 is tax-deductible. Now, as we go even more and further every month I get a smaller and smaller tax-deductible portion of my real home loan payment. Out here the tax reduction is really very little. As I'm preparing yourself to pay off my whole mortgage and get the title of my home.
This doesn't indicate, let's say that, let's say in one year, let's say in one year I paid, I don't understand, I'm going to make up a number, I didn't calculate 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 mortgages work in monopoly.
And, however let's say $10,000 went to interest. To say this deductible, and let's say prior to this, let's 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 say I was paying approximately 35 percent on that $100,000.
Let's state, you know, if I didn't have this home 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 estimate. 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 normally owed and just paid $25,000.
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So, when I tell 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 had the ability to subtract this, not straight from my taxes, I had the ability 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 in fact 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 reduction, $10,000 of deductible interest, I essentially conserved $3,500. I did not conserve $10,000. So, another way to consider 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 Internal Revenue Service. If there's something that you could actually take straight from your taxes, that's called a tax credit - how do mortgages work in the us. So, if you were, uh, if there was some special thing that you might actually subtract it straight from your credit, from your taxes, that's a tax credit, tax credit.
Therefore, in this spreadsheet I just want to show you that I in fact calculated because month just how much of a tax deduction do you get. So, for instance, just off of the 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 save about $7,000 in taxes, so that's nothing, nothing to sneeze at. Anyway, ideally you discovered this valuable and I encourage you to go to that spreadsheet and, uh, have fun with the assumptions, only the assumptions in this brown color unless you actually understand what you're making with the spreadsheet.
What I want to finish with this video is explain what a mortgage is but I think the majority of us have a least a general sense of it. However even better than that really enter into the numbers and understand a bit of what you are in fact doing when you're paying a home loan, what it's made up of and just how much of it is interest versus how much of it is in fact paying for the loan - how do fixed rate mortgages work.