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 an excellent person, I'm not going to default on my mortgage so I make that very first home loan 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, 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 actually increased by precisely $410. Now, you're probably stating, hello, gee, I made a $2,000 payment, an approximately a $2,000 payment and my equity just increased by $410,000.
So, that very, in the beginning, your payment, your $2,000 payment is primarily interest. Just $410 of it is principal. However as you, and after that you, and then, so as your loan balance decreases 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 loan again. This is my brand-new loan balance. And notice, already by month 2, $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 an actual, substantial distinction.
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This is the interest and primary parts of our mortgage payment. http://amarise6es.nation2.com/some 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 exact, this is precisely our home 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 actually pay for the principal, the real loan amount.
The majority of it opted for the interest of the month. However 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 much 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 in fact goes to settle the loan.
Now, the last thing I desire to talk about in this video without making it too long is this concept of a interest tax reduction (explain how mortgages work). So, a great deal of times you'll hear financial organizers or realtors tell you, hey, the benefit of purchasing your home is that it, it's, it has tax advantages, and it does.
Your interest, not your whole payment. Your interest is tax deductible, deductible. And I wish to be very clear with what deductible methods. So, let's for example, talk 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 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 further every month I get a smaller and smaller tax-deductible portion of my actual home loan payment. Out here the tax reduction is actually very small. As I'm preparing to settle my whole home loan and get the title of my home.
This does not mean, 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 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. how mortgages work.
And, however let's state $10,000 went to interest. To say this deductible, and let's state prior to this, let's state 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 state I was paying roughly 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. Just, this is simply a rough quote. Now, when you state 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 say that I made $90,000 because I was able to subtract this, not directly from my taxes, I had the ability to deduct it mytimeshare com 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 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 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 save 35 percent of this in actual taxes.
You're deducting it from the earnings that you report to the Internal Revenue Service. If there's something that you might in fact take straight from your taxes, that's called a tax credit - how do 2nd mortgages work. So, if you were, uh, if there was some special thing that you might really subtract it straight from your credit, from your taxes, that's a tax credit, tax credit.
Therefore, in this spreadsheet I just want to reveal you that I really determined 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 presumptions, 35 percent of $1,700.
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So, approximately over the course of the very first year I'm going to save about $7,000 in taxes, so that's absolutely nothing, absolutely nothing to sneeze at. Anyhow, hopefully you found this handy and I motivate you to go to that spreadsheet and, uh, have fun with the presumptions, just the assumptions in this brown color unless you actually know what you're making with the spreadsheet.
What I wish to do with this video is discuss what a home mortgage is however I believe the majority of us have a least a general sense of it. However even much better than that actually enter into the numbers and understand a bit of what you are in fact doing when you're paying a mortgage, what it's made up of and just how much of it is interest versus how much of it is in fact paying down the loan - how do business mortgages work.