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Now, what I've done here is, well, actually before I get to the chart, let me actually show you how I determine the chart and I do this throughout 30 years and it passes month. So, so you can picture that there's in fact 360 rows here on the real spreadsheet and you'll see that if you go and open it up. how long are 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 mortgage payments yet.
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 good guy, I'm not going to default on my home mortgage so I make that very first mortgage 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, remember, 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 actually gone up by precisely $410. Now, you're probably saying, hello, gee, I made a $2,000 payment, a roughly a $2,000 payment and my equity only increased by $410,000.
So, that very, in the start, your payment, your $2,000 payment is primarily interest. Only $410 of it is primary. However as you, and then you, and after that, 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 brand-new prepayment balance. I pay my home mortgage again. This is my brand-new loan balance. And notification, already by month 2, $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 a real, sizable distinction.
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This is the interest and primary parts 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 observe, this is the exact, this is exactly our home mortgage payment, this $2,129 (when to refinance mortgages). Now, on that extremely 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 for the principal, the real loan quantity.
The majority of it went for the interest of the month. But as I begin 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 better color than that. There is less interest, let's state if we head 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 want to speak about in this video without making it too long is this idea of a interest tax reduction. So, a lot of times you'll hear financial organizers or realtors tell you, hey, the advantage of buying http://patricyt5f.nation2.com/not-known-facts-about-what-is-the-current-interest your home is that it, it's, it has tax benefits, and it does. how do reverse mortgages work.
Your interest, not your entire payment. Your interest is tax deductible, deductible. And I wish to be really clear with what deductible means. So, let's for example, speak about the interest fees. 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 even more and further every month I get a smaller sized and smaller sized tax-deductible portion of my actual home mortgage payment. Out here the tax deduction is actually extremely small. As I'm getting all set to pay off my whole home mortgage and get the title of my home.
This does not mean, let's say that, let's say in one year, let's state 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, but let's state $10,000 went to interest. To say this deductible, and let's say 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 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 mean that I can simply take it from the $35,000 that I would have typically owed and just paid $25,000.
So, when I tell the IRS just how much did I make this year, instead of saying, I made $100,000 I say that I made $90,000 since I was able to subtract this, not straight from my taxes, I was able 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 computed.
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 conserve 35 percent of this in real taxes.
You're deducting it from the income that you report to the IRS. If there's something that you might really take can a timeshare ruin your credit straight from your taxes, that's called a tax credit. So, if you were, uh, if there was some special thing that you might really deduct it directly from your credit, from your taxes, that's a tax credit, tax credit.
Therefore, in this spreadsheet I simply desire to show you that I in fact computed because month just how much of a tax deduction do you get. So, for example, simply off of the very 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 - which type of credit is usually used for cars.
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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, nothing to sneeze at. Anyhow, hopefully you found this valuable and I encourage you to go to that spreadsheet and, uh, have fun with the assumptions, only the presumptions in this brown color unless you actually understand what you're finishing with the spreadsheet.