So, now prior to 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 loan so I make that first mortgage payment that we determined, 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 increased by precisely $410. Now, you're most likely saying, hi, gee, I made a $2,000 payment, an approximately 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 mostly interest. Only $410 of it is primary. However as you, and after that you, and after that, so as your loan balance goes down you're going to pay less interest https://www.openlearning.com/u/esterly-qfl9qo/blog/H1StyleclearbothIdcontentsection07EasyFactsAboutHowToHouseMortgagesWorkExplainedh1/ here and so each wesley dutchman 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 mortgage once again. This is my brand-new loan balance. And notice, 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 an actual, large distinction.
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This is the interest and principal portions of our home loan 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 observe, this is the specific, this is exactly our home loan payment, this $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 for the principal, the actual loan quantity.
Many 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, 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 really goes to settle the loan.
Now, the last thing I wish to discuss in this video without making it too long is this concept of a interest tax reduction (how do points work in mortgages). So, a great deal of times you'll hear monetary planners 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 whole payment. Your interest is tax deductible, deductible. And I want to be extremely clear with what deductible ways. So, let's for instance, discuss 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 even more and even more every month I get a smaller sized and smaller sized tax-deductible portion of my actual home loan payment. Out here the tax reduction is in fact very small. As I'm getting prepared to pay off my whole home mortgage and get the title of my home.
This doesn't imply, let's state that, let's state in one year, let's state in one year I paid, I don't 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 assumable mortgages work.
And, however let's state $10,000 went to interest. To state 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 say 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 home loan I would pay 35 percent taxes which would be about $35,000 in taxes for that year. Just, this is just a rough quote. Now, when you say that $10,000 is tax-deductible, the interest is tax-deductible, that does not mean that I can just take it from the $35,000 that I would have typically owed and just paid $25,000.
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So, when I tell the Internal Revenue Service how much did I make this year, rather of stating, 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 subtract it from my earnings. So, now if I just made $90,000 and I, and this is I'm doing a gross oversimplification of how taxes actually get computed.
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 basically saved $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 conserve 35 percent of this in actual taxes.
You're subtracting it from the earnings that you report to the IRS. If there's something that you could actually take directly from your taxes, that's called a tax credit - how do buy to let mortgages work uk. So, if you were, uh, if there was some special thing that you might actually subtract it directly from your credit, from your taxes, that's a tax credit, tax credit.
Therefore, in this spreadsheet I just want to show you that I in fact determined because month just how much of a tax deduction do you get. So, for instance, simply 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, roughly over the course of the very first year I'm going to conserve 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, just the assumptions in this brown color unless you really know what you're finishing with the spreadsheet.
What I wish to do with this video is describe what a home mortgage is but I think most of us have a least a basic sense of it. But even better than that actually go into the numbers and comprehend a bit of what you are actually doing when you're paying a mortgage, what it's comprised of and how much of it is interest versus how much of it is in fact paying for the loan - how do mortgages payments work.