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Now, what I have actually done here is, well, in fact prior to I get to the chart, let me in fact show you how I calculate the chart and I do this over the course of thirty years and it goes by month. So, so you can imagine that there's actually 360 rows here on the actual spreadsheet and you'll see that if you go and open it up. what are mortgages.
So, on month zero, which I do not show here, you borrowed $375,000. Now, over the course of that month they're going to charge you 0.46 percent interest, remember that was 5.5 percent divided by 12. 0.46 percent interest on $375,000 is $1,718.75. So, I have not made any home loan payments yet.
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 an excellent guy, I'm not going to default on my home mortgage so I make that very first mortgage payment that we computed, 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 westland finance one loan balance, after, after my first payment I now have $125,410 in equity. So, my equity has actually gone up by precisely $410. Now, you're most likely stating, hello, gee, I made a $2,000 payment, an approximately a $2,000 payment and my equity just went up by $410,000.
So, that extremely, in the beginning, your payment, your $2,000 payment is primarily interest. Just $410 of it is primary. But as you, and after that you, and after that, 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 new prepayment balance. I pay my home mortgage again. This is my new loan balance. And notification, already by month two, $2.00 more went to principal and $2.00 less went to interest. And over the course of 360 months you're visiting that it's a real, sizable distinction.
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This is the interest and principal parts of our home 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 observe, this is the specific, this is precisely our home mortgage payment, this $2,129 (which type of interest is calculated on home mortgages). Now, on that very 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 real loan amount.
Many of it chose the interest of the month. But as I start paying for 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 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 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 deduction. So, a great deal of times you'll hear financial organizers or realtors inform you, hey, the advantage of purchasing your house is that it, it's, it has tax advantages, and it does. non-federal or chartered banks who broker or lend for mortgages must be registered with.
Your interest, not your whole payment. Your interest is tax deductible, deductible. And I wish to be very clear with what deductible ways. So, let's for example, speak about the interest costs. 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.
That $1,700 is tax-deductible. Now, as we go even more and even more every month I get a smaller sized and smaller sized tax-deductible portion of my actual home loan payment. Out here the tax deduction is actually really small. As I'm getting ready 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 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 state in year one, year one, I pay, I pay $10,000 in interest, $10,000 in interest.
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And, but let's say $10,000 went to interest. To state this deductible, and let's say prior to this, let's state 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 say I was paying roughly 35 percent on that $100,000.
Let's say, 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. Just, this is just 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 typically owed and just paid $25,000.
So, when I tell the IRS just how much did I make this year, rather of stating, I made $100,000 I state that I made $90,000 due to the fact that I had the ability to subtract this, not directly from my taxes, I was able to subtract it from my income. So, now if I just made $90,000 and I, and this is I'm doing a gross oversimplification of follow this link how taxes in fact 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 reduction, $10,000 of deductible interest, I essentially 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 save 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 might really take straight from your taxes, that's called a tax credit. So, if you were, uh, if there was some unique thing that you might actually subtract 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 really calculated because month how much of a tax reduction do you get. So, for instance, just off of the 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 assumptions, 35 percent of $1,700 - how do second mortgages work.
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So, approximately throughout the very first year I'm going to conserve about $7,000 in taxes, so that's nothing, nothing to sneeze at. Anyhow, ideally you discovered this handy and I motivate you to go to that spreadsheet and, uh, play with the presumptions, just the assumptions in this brown color unless you truly know what you're finishing with the spreadsheet.