So, now before 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 very first mortgage payment that we calculated, 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 first payment I now have $125,410 in equity. So, my equity has actually 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 just went up by $410,000.
So, that very, in the start, your payment, your $2,000 payment is mainly 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 Click to find out more and less weighted towards interest.
This is your new prepayment balance. I pay my home loan again. This is my new loan balance. And notice, already by month 2, $2.00 more went to primary and $2.00 less went to interest. And over the course of 360 months you're visiting that it's an actual, sizable difference.
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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 little bit, this is by month. So, this whole height, if you notice, this is the exact, this is precisely our mortgage 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, only $400 of it went to actually 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, 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 go out here, this is month 198, over 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 reverse mortgages work?). So, a lot of times you'll hear monetary organizers or real estate agents tell you, hey, the advantage of buying your home 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 desire to be very clear with what deductible means. So, let's for example, speak about the interest charges. 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 even more and even more monthly I get a smaller sized and smaller sized tax-deductible portion of my real mortgage payment. Out here the tax deduction is actually extremely small. As I'm preparing to pay off my entire mortgage and get the title of my home.
This doesn't mean, let's say that, let's state in one year, let's say 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. obtaining a home loan and how mortgages work.
And, however let's say $10,000 went to interest. To say this deductible, and let's state before 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 understand, if I didn't have this mortgage 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 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 typically owed and just paid $25,000.
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So, when I inform the IRS just how much did I make this year, instead 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 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 really get computed.
Let's get the calculator. So, 90 times.35 is equal 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 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 conserve 35 percent of this in real taxes.
You're subtracting it from the earnings that you report to the Internal Revenue Service. If there's something that you could actually take directly from your taxes, that's called a tax credit - how do escrow accounts work for mortgages. So, if you were, uh, if there was some special thing that you might in fact subtract it straight from your credit, from your taxes, that's a tax credit, tax credit.
And so, in this spreadsheet I just desire to reveal you that I actually computed because month how much of a tax deduction do you get. So, for instance, simply 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 presumptions, 35 percent of $1,700.
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So, approximately over the course of the first year I'm going to save about $7,000 in taxes, westlake financial services memphis tn so that's absolutely nothing, absolutely nothing to sneeze at. Anyhow, hopefully you discovered this handy and I encourage you to go to that spreadsheet and, uh, play with the presumptions, just the presumptions in this brown color unless you actually understand what you're making with the spreadsheet.
What I desire to make with this video is discuss what a home mortgage is but I think many of us have a least a general sense of it. However even better than that actually enter into the numbers and understand a little bit of what you are actually doing when you're paying a home mortgage, what it's comprised of and just how much of it is interest versus just how much of it is really paying for the loan - how do mortgages work in monopoly.