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 not going to default on my home mortgage so I make that very first home loan payment that we computed, that we computed 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 very first payment I now have $125,410 in equity. So, my equity has increased by precisely $410. Now, you're most likely stating, hey, gee, I made a $2,000 payment, an approximately a $2,000 payment and my equity just increased by $410,000.
So, that really, in the beginning, your payment, your $2,000 payment is mainly interest. Only $410 of it is principal. However as you, and after that 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 new prepayment balance. I pay my mortgage once again. This is my new loan balance. And notice, already by month two, $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, large difference.
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This is the interest and principal parts of our home loan 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 see, this is the exact, this is exactly our home 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 in fact pay down the principal, the actual loan amount.
The majority of it opted for the interest of the month. However as I begin paying down 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 actually goes to settle the loan.
Now, the last thing I wish to discuss in this video without making it too long is this idea of a interest tax deduction (how do variable mortgages work in canada). So, a great deal of times you'll hear financial organizers or real estate agents tell you, hey, the benefit of buying 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 really clear with what deductible methods. So, let's for example, discuss 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 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 even more each month I get a smaller and smaller tax-deductible portion of my real mortgage payment. Out here the tax deduction is in fact very small. As I'm preparing yourself to settle my whole home loan and get the title of my house.
This doesn't suggest, let's say that, let's say in one year, let's say in one year I paid, I don't know, I'm going to comprise 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, however let's say $10,000 went to interest. To state this deductible, and let's state prior to this, let's say before 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 state I was paying approximately 35 percent on that $100,000.
Let's state, you understand, 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. Simply, 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 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 tell the Internal Revenue Service just how much did I make this year, instead of stating, I made $100,000 I Visit this link say that I made $90,000 because I was able to deduct this, not directly from my taxes, I had the ability 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 how taxes really get computed.
Let's get the calculator. So, 90 times.35 amounts to $31,500. So, this will Browse around this site amount to $31,500, put a comma here, $31,500. So, off of a $10,000 deduction, $10,000 of deductible interest, I essentially conserved $3,500. I did not save $10,000. So, another method 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 actual taxes.
You're deducting it from the income that you report to the IRS. If there's something that you could really take directly from your taxes, that's called a tax credit - how mortgages work. So, if you were, uh, if there was some unique 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 simply want to show you that I really computed because 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 home 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 first year I'm going to save about $7,000 in taxes, so that's absolutely nothing, nothing to sneeze at. Anyway, ideally you discovered this useful and I motivate you to go to that spreadsheet and, uh, play with the presumptions, just the presumptions in this brown color unless you really know what you're doing with the spreadsheet.
What I wish to make with this video is describe what a mortgage is but I think the majority of us have a least a basic sense of it. But even much better than that actually enter into the numbers and comprehend a bit of what you are really doing when you're paying a home mortgage, what it's made up of and just how much of it is interest versus just how much of it is really paying down the loan - how do fixed rate mortgages work.