So, now before 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 great man, I'm not going to default on my home mortgage so I make that very first home loan 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 began 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, hey, gee, I made a $2,000 payment, an approximately a $2,000 payment and my equity just increased by $410,000.
So, that extremely, in the beginning, your payment, your $2,000 payment is mostly interest. Just $410 of it is principal. But as you, and then you, and after that, so as your loan balance decreases you're going to pay less interest here therefore 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 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 an actual, sizable distinction.
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This is the interest and principal parts 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 entire height, if you observe, this is the specific, this is precisely our home mortgage payment, this $2,129. Now, on that extremely first month you saw that of my $2,100 just $400 of it, this is the $400, just $400 of it went to really pay for the principal, the real loan amount.
Many of it chose the interest of the month. However as I start paying for the loan, as the loan balance gets smaller 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 say if we head out here, this is month 198, over there, that last month there was less interest so more of my $2,100 really goes to pay off the loan.
Now, the last thing I wish to talk about in this video without making it too long is this idea of a interest tax reduction (how do business Visit website mortgages work). So, a great deal of times you'll hear monetary planners or real estate agents tell you, hey, the advantage of purchasing your house is that it, it's, it has tax advantages, and it does.
Your interest, not 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, 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 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 actual mortgage payment. Out here the tax deduction is in fact extremely little. As I'm getting prepared to settle my whole home mortgage and get the title of my home.
This does not suggest, let's say that, let's say in one year, let's state in one year I paid, I do not know, I'm going to make up a number, I didn't determine 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 escrow accounts work for mortgages.
And, however let's say $10,000 went to interest. To say this deductible, and let's state prior to this, let's say prior to 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 say, you understand, if I didn't have this home mortgage 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 say 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 usually owed and only paid $25,000.
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So, when I tell the IRS how much did I make this year, instead of saying, I made $100,000 I say that I made $90,000 since I had the ability to deduct this, not straight from my taxes, I was able 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 really get calculated.
Let's get the calculator. So, 90 times.35 is equal to $31,500. So, this will amount to $31,500, put a comma here, $31,500. So, off of a $10,000 deduction, $10,000 of deductible interest, I essentially saved $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 save 35 percent of this in real taxes.
You're deducting it from the earnings that you report to the IRS. If there's something that you could actually take straight from your taxes, that's called a tax credit - how do reverse mortgages really work. So, if you were, uh, if there was some special thing that you could actually subtract it straight from your credit, from your taxes, that's a tax credit, tax credit.
And so, in this spreadsheet I just want to reveal you that I in fact calculated 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 over the course of the very first year I'm going to conserve about $7,000 in taxes, so that's absolutely http://aebbatwlfv.booklikes.com/post/3140282/the-smart-trick-of-how-do-mortgages-work-with-person-with-bad-credit-and-cosigber-that-nobody-is-discussing nothing, absolutely nothing to sneeze at. Anyhow, hopefully you discovered this helpful and I encourage 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 making with the spreadsheet.
What I desire to make with this video is describe what a home mortgage is however I believe the majority of us have a least a basic sense of it. However 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 in fact paying for the loan - how reverse mortgages work.