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Now, what I have actually done here is, well, actually prior to I get to the chart, let me actually show you how I determine the chart and I do this over the course of thirty years and it goes by month. So, so you can imagine that there's really 360 rows here on the real spreadsheet and you'll see that if you go and open it up. what does it mean when economists say that home buyers are "underwater" on their mortgages?.
So, on month no, which I don't reveal here, you borrowed $375,000. Now, over the course of that month they're going to charge you 0.46 percent interest, keep in mind that was 5.5 percent divided by 12. 0.46 percent interest on $375,000 is $1,718.75. So, I haven't made any home loan payments yet.
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 home loan so I make that very first mortgage payment that we determined, that we calculated 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 exactly $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 very, in the start, your payment, your $2,000 payment is primarily interest. Only $410 of it is primary. But as you, and after that 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 new prepayment balance. I pay my home loan again. This is my brand-new loan balance. And notice, currently by month 2, $2.00 more went to principal and $2.00 less went to interest. http://messiahgxcr767.almoheet-travel.com/h1-style-clear-both-id-content-section-0-what-does-who-does-reverse-mortgages-mean-h1 And over the course of 360 months you're going to see that it's a real, large distinction.
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This is the interest and primary 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 whole height, if you discover, this is the precise, this is exactly our mortgage payment, this $2,129 (what are reverse mortgages). 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 real loan quantity.
Many of it chose the interest of the month. However as I begin paying down the loan, as the loan balance gets smaller and smaller, 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 say 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 pay off the loan.
Now, the last thing I desire to talk about in this video without making it too long is this idea of a interest tax deduction. So, a lot of times you'll hear financial planners or realtors tell you, hey, the benefit of purchasing your house is that it, it's, it has tax benefits, and it does. reverse mortgages are most useful for elders who.
Your interest, not your entire payment. Your interest is tax deductible, deductible. And I desire to be really clear with what deductible means. So, let's for circumstances, speak about the interest costs. 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.
That $1,700 is tax-deductible. Now, as we go further and even more every month I get a smaller sized and smaller tax-deductible portion of my actual home mortgage payment. Out here the tax deduction is actually very small. As I'm getting prepared to settle my whole home mortgage and get the title of my house.
This doesn't mean, 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 make up 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.
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And, however let's state $10,000 went to interest. To state 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 say I was paying approximately 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 have to do with $35,000 in taxes for that year. Simply, this is just a rough estimate. Now, when you say that $10,000 is tax-deductible, the interest is tax-deductible, that does not mean that I can simply take it from the $35,000 that I would have generally owed and just paid $25,000.
So, when I tell the IRS just how much did I Look at more info make this year, rather of stating, I made $100,000 I state that I made $90,000 since I had the ability to subtract this, not straight 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 determined.
Let's get the calculator. So, 90 times.35 is equivalent to $31,500. So, this will be equivalent to $31,500, put a comma here, $31,500. So, off of a $10,000 deduction, $10,000 of deductible interest, I basically saved $3,500. I did not conserve $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 deducting it from the income that you report to the Internal Revenue Service. If there's something that you could in fact take directly from your taxes, that's called a tax credit. So, if you were, uh, if there was some special thing that you could in fact subtract it directly from your credit, from your taxes, that's a tax credit, tax credit.
And so, in this spreadsheet I just wish to reveal you that I in fact calculated because month just how much of a tax reduction do you get. So, for instance, just 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 presumptions, 35 percent of $1,700 - how many mortgages can you have.
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So, approximately over the course of the first year I'm going to conserve about $7,000 in taxes, so that's nothing, nothing to sneeze at. Anyway, hopefully you discovered this practical and I encourage you to go to that spreadsheet and, uh, play with the assumptions, just the assumptions in this brown color unless you actually know what you're finishing with the spreadsheet.