So, now prior to I pay any of my payments, instead of owing $375,000 at the end of the very first month I owe $376,718. Now, I'm a hero, I'm not going to default on my home loan so I make that very first home loan 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, remember, 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 precisely $410. Now, you're probably stating, hello, gee, I made a $2,000 payment, a roughly a $2,000 payment and my equity just went up by $410,000.
So, that really, in the start, your payment, your $2,000 payment is mostly interest. Only $410 of it is principal. But 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 home mortgage once again. This is my brand-new loan balance. And notice, already by month two, $2.00 more went to primary and $2.00 less went to interest. And throughout 360 months you're visiting that it's a real, substantial difference.
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This is the interest and primary parts of our home mortgage payment. So, this whole 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 precisely our home loan payment, this wesley dutchman $2,129. Now, on that really first month you saw that of my $2,100 only $400 of it, this is the $400, just $400 of it went to in fact pay down the principal, the real loan amount.
Many of it opted for the interest of the month. But as I begin 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 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 https://blogfreely.net/nathopbk6w/the-most-typical-mortgage-in-canada-is-the-five-year-fixed-rate-closed-home less interest so more of my $2,100 really goes to settle the loan.
Now, the last thing I wish to talk about in this video without making it too long is this concept of a interest tax deduction (how do arm mortgages work). So, a great deal of times you'll hear monetary coordinators or real estate agents inform you, hey, the advantage of buying your home is that it, it's, it has tax benefits, 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 instance, talk about 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 starting 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 each month I get a smaller sized and smaller sized tax-deductible portion of my real home loan payment. Out here the tax reduction is really very small. As I'm preparing yourself to settle my entire 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 understand, I'm going to comprise 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 interest. how do 2nd mortgages work.
And, however let's say $10,000 went to interest. To state this deductible, and let's state before this, let's state 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 approximately 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. Simply, this is simply a rough price quote. Now, when you state that $10,000 is tax-deductible, the interest is tax-deductible, that does not indicate that I can simply take it from the $35,000 that I would have normally owed and just paid $25,000.
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So, when I inform the IRS how much did I make this year, rather of stating, I made $100,000 I say that I made $90,000 because I was able 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 calculated.
Let's get the calculator. So, 90 times.35 is equal to $31,500. So, this will be equivalent to $31,500, put a comma here, $31,500. So, off of a $10,000 reduction, $10,000 of deductible interest, I basically 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 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 - how do mortgages work in monopoly. So, if you were, uh, if there was some special thing that you could 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 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 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.
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So, roughly over the course of the first year I'm going to conserve about $7,000 in taxes, so that's nothing, absolutely nothing to sneeze at. Anyhow, hopefully you found this practical and I encourage you to go to that spreadsheet and, uh, play with the assumptions, only the presumptions in this brown color unless you really understand what you're finishing with the spreadsheet.
What I wish to finish with this video is explain what a home loan is however I think many of us have a least a general sense of it. However even better than that really go into the numbers and comprehend a bit of what you are actually doing when you're paying a home loan, what it's comprised of and how much of it is interest versus how much of it is in fact paying down the loan - how do reverse mortgages work after death.