So, now before 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 an excellent person, I'm not going to default on my home loan so I make that very first home mortgage payment that we computed, that we calculated 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 increased by exactly $410. Now, you're probably stating, hey, gee, I made a $2,000 payment, a roughly a $2,000 payment and my equity only increased by $410,000.
So, that extremely, in the start, your payment, your $2,000 payment is primarily interest. Only $410 of it is principal. But as you, and after that you, and after that, 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 loan once again. This is my new loan balance. And notification, currently by month 2, $2.00 more went to principal and $2.00 less went to interest. And over the course of 360 months you're going to see that it's an actual, substantial distinction.
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This is the interest and principal parts of our home loan payment. So, this whole height right Go here here, this is, let me scroll down a little bit, this is by month. So, this entire height, if you notice, this is the precise, this is exactly our home mortgage payment, this $2,129. Now, on that very first month you saw that of my $2,100 just $400 of it, this https://karanaujlamusicsta39.wixsite.com/johnnyeise188/post/h1-styleclearboth-idcontentsection03-simple-techniques-for-how-do-2nd-mortgages-workh1 is the $400, only $400 of it went to in fact pay for the principal, the real loan quantity.
Many of it opted for the interest of the month. However as I start 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 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 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 deduction (how adjustable rate mortgages work). So, a great deal of times you'll hear financial coordinators or realtors inform you, hey, the benefit of purchasing your house 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 wish to be really clear with what deductible ways. So, let's for example, speak about the interest charges. 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 lot of that is interest.
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That $1,700 is tax-deductible. Now, as we go even more and further every month I get a smaller and smaller sized tax-deductible portion of my actual home loan payment. Out here the tax deduction is really really small. As I'm preparing to settle my entire mortgage and get the title of my house.
This does not indicate, let's say that, let's state in one year, let's state in one year I paid, I don't know, 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 reverse mortgages work example.
And, however let's say $10,000 went to interest. To say this deductible, and let's say prior to this, let's state 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 say I was paying roughly 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 be about $35,000 in taxes for that year. Just, this is just a rough price quote. Now, when you say that $10,000 is tax-deductible, the interest is tax-deductible, that does not indicate that I can just take it from the $35,000 that I would have typically owed and only paid $25,000.
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So, when I tell the Internal Revenue Service just 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 was able to deduct it from my income. So, now if I only made $90,000 and I, and this is I'm doing a gross oversimplification of how taxes actually get calculated.
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 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 save 35 percent of this in actual taxes.
You're deducting it from the earnings that you report to the IRS. If there's something that you could really take straight from your taxes, that's called a tax credit - how do assumable mortgages work. So, if you were, uh, if there was some special thing that you could actually deduct it straight from your credit, from your taxes, that's a tax credit, tax credit.
Therefore, in this spreadsheet I simply want to reveal you that I really 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 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, approximately 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 valuable and I encourage you to go to that spreadsheet and, uh, have fun with the assumptions, just the assumptions in this brown color unless you truly understand what you're doing with the spreadsheet.
What I wish to make with this video is discuss what a home mortgage is but I believe many of us have a least a general sense of it. But even much better than that in fact enter into the numbers and understand a little bit of what you are in fact doing when you're paying a mortgage, what it's made up of and just how much of it is interest versus how much of it is in fact paying down the loan - how do reverse mortgages really work.