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 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 first payment I now have $125,410 in equity. So, my equity has increased by precisely $410. Now, you're probably saying, hey, gee, I made a $2,000 payment, a roughly a $2,000 payment and my equity only went up by $410,000.
So, that extremely, in the start, your payment, your $2,000 payment is mainly interest. Only $410 of it is principal. However as you, and then you, and then, so as your loan balance goes down 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 brand-new prepayment balance. I pay my home mortgage again. This is my new loan balance. And notice, currently 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 going to see that it's an actual, sizable distinction.
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This is the interest and principal portions of our mortgage payment. So, this whole height right here, this is, let me scroll down a little bit, this is by month. So, this entire height, if you notice, this is the precise, this is exactly our home loan payment, this $2,129. Now, on that really 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 quantity.
The majority of it opted for the interest of the month. But as I start paying for the loan, as the loan balance gets smaller sized 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 concept of a interest tax reduction (how do points work in mortgages). So, a lot of times you'll hear monetary organizers or realtors inform you, hey, the advantage of purchasing your home 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 desire to be really clear with what deductible methods. So, let's for instance, 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 lot of that is interest.
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That $1,700 is tax-deductible. Now, as we go further and further monthly I get a smaller and smaller sized tax-deductible portion of my real home mortgage payment. Out here the tax deduction is really extremely small. As I'm getting ready to pay off my entire home loan and get the title of my home.
This does not imply, let's say that, let's state in one year, let's say in one year I paid, I do not understand, I'm going to make up a number, I didn't determine it on the spreadsheet. Let's state in year one, year one, I pay, I pay $10,000 in interest, $10,000 in Get more info interest. buy to let mortgages how do they work.
And, but let's say $10,000 went to interest. To say this deductible, and let's say prior to this, let's say 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 state I was paying roughly 35 percent on that $100,000.
Let's say, you know, 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 just a rough estimate. 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 usually owed and only paid $25,000.
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So, when I inform the Internal Revenue Service how much did I make this year, rather of stating, I made $100,000 I Homepage say that I made $90,000 since 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 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 consider 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 subtracting it from the earnings that you report to the Internal Revenue Service. If there's something that you might really take directly from your taxes, that's called a tax credit - reverse mortgages how do they work. So, if you were, uh, if there was some unique thing that you might in fact deduct it directly from your credit, from your taxes, that's a tax credit, tax credit.
And so, in this spreadsheet I just wish to show you that I in fact calculated 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 assumptions, 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 nothing, nothing to sneeze at. Anyway, hopefully you found this useful and I encourage you to go to that spreadsheet and, uh, play with the assumptions, only the assumptions in this brown color unless you truly understand what you're doing with the spreadsheet.
What I want to make with this video is describe what a mortgage is but I think many of us have a least a basic sense of it. But even better than that in fact enter into the numbers and comprehend a little bit of what you are really doing when you're paying a home loan, what it's comprised of and just how much of it is interest versus just how much of it is in fact paying down the loan - how do reverse mortgages work in california.