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Now, what I've done here is, well, in fact prior to I get to the chart, let me really show you how I compute the chart and I do this over the course of thirty years and it passes month. So, so you can envision that there's really 360 rows here on the real spreadsheet and you'll see that if you go and open it up. how do second mortgages work.
So, on month no, which I don't reveal here, you borrowed $375,000. Now, throughout 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 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 good man, I'm not going to default on my home mortgage so I make that first home loan payment that we calculated, that we computed 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 very, in the beginning, your payment, your $2,000 payment is mainly interest. Only $410 of it is principal. However as you, and after that you, and after that, 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 mortgage again. This is my brand-new loan balance. And notice, already 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 visiting that it's an actual, sizable distinction.
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This is the interest and principal parts of our home loan payment. So, this entire height right here, this is, let me scroll down a bit, this is by month. So, this whole height, if you observe, this is the specific, this is precisely our home mortgage payment, this $2,129 (how reverse mortgages work). Now, on that really first month you saw that of my $2,100 just $400 of it, this is the $400, only $400 of it went to in fact pay down the principal, the actual loan amount.
Many of it opted for the interest of the month. However as I begin paying down 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, 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 wish 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 monetary coordinators or realtors tell you, hey, the advantage of purchasing your house is that it, it's, it has tax benefits, and it does. how much can i borrow mortgages.
Your interest, not your entire payment. Your interest is tax deductible, deductible. And I want to be extremely clear with what deductible ways. So, let's for example, talk about the interest fees. So, this whole time over thirty years I am paying $2,100 a month or $2,129.29 a month. Now, at the beginning a great deal of that is interest.
That $1,700 is tax-deductible. Now, as we go even more and even more every month I get a smaller sized and smaller tax-deductible portion of my real mortgage payment. Out here the tax reduction is actually very small. As I'm getting ready to pay off my entire home mortgage and get the title of my house.
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 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.
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And, but let's state $10,000 went to interest. To state this deductible, and let's say before 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 say I was paying roughly 35 percent on that $100,000.
Let's state, you know, if I didn't have this mortgage I would pay 35 percent taxes which would be about $35,000 in taxes for that year. Simply, this is simply a rough price quote. 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 state that I made $90,000 because I was able to deduct this, not straight from my taxes, I had the ability to deduct 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 in fact get computed.
Let's get the calculator. So, 90 times.35 is equal to $31,500. So, this will be equal 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 conserve $10,000. So, another way to believe about it if I paid $10,000 interest, I'm going to, and my tax rate is 35 percent, I'm going to conserve Click here for info 35 percent of this in actual taxes.
You're deducting it from the income that you report to the IRS. If there's something that you might really take straight from your taxes, that's called a tax credit. So, if you were, uh, if there was some unique thing that you could in fact deduct it straight from your credit, from your taxes, that's a tax credit, tax credit.
Therefore, in this spreadsheet I simply wish to reveal you that I in fact determined because month how much of a tax reduction 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 - how reverse mortgages work.
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So, approximately over the course of the first year I'm going to save about $7,000 in taxes, so that's nothing, absolutely nothing to sneeze at. Anyway, hopefully you discovered this helpful and I motivate you to go to that spreadsheet and, uh, have fun with the presumptions, only the presumptions in this brown color unless you actually know what you're doing with amanda davis hospitalized the spreadsheet.