So, now prior to 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 an excellent man, I'm not going to default on my mortgage so I make that first home loan payment that we calculated, that we calculated right over here.
Now, this right here, what I, little asterisk here, this is my equity now. So, keep in mind, I began with $125,000 of equity. After paying one loan balance, after, after my very first payment I now have $125,410 in equity. So, my equity has gone up by precisely $410. Now, you're most likely saying, hey, gee, I made a $2,000 payment, an approximately a $2,000 payment and my equity just went up by $410,000.
So, that very, in the start, your payment, your $2,000 payment is mainly interest. Just $410 of it is principal. However as you, and then you, and then, so as your loan balance decreases 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 new loan balance. And notification, already by month two, $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, sizable difference.
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This is the interest and primary portions of our home loan payment. So, this entire 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 specific, this is exactly our home loan payment, this $2,129. Now, on that very first month you saw that of my $2,100 just $400 of it, this is the $400, only $400 of it went to really pay down the principal, the real loan amount.
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 sized and smaller sized, each of my payments, there's less interest to pay, let me do a better color than that. There http://zanemwsr128.over-blog.com/2020/09/h1-style-clear-both-id-content-section-0-the-only-guide-to-how-do-owner-financing-mortgages-work/h1.html 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 in fact goes to pay off the loan.
Now, the last thing I wish to speak about in this video without making it too long More helpful hints is this concept of a interest tax deduction (how do points work in mortgages). So, a lot of times you'll hear financial organizers or realtors inform you, hey, the benefit of buying 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 wish to be extremely clear with what deductible means. So, let's for circumstances, talk about the interest costs. So, this whole 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 further and even more each month I get a smaller and smaller sized tax-deductible portion of my actual mortgage payment. Out here the tax deduction is really extremely small. As I'm preparing to settle my entire home 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 do not understand, I'm going to comprise a number, I didn't calculate 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 fixed rate mortgages work.
And, however let's say $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 say I was making $100,000 a year and let's state I was paying roughly 35 percent on that $100,000.
Let's say, 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 state that $10,000 is tax-deductible, the interest is tax-deductible, that does not suggest that I can simply take it from the $35,000 that I would have normally 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, instead of stating, I made $100,000 I say that I made $90,000 due to the fact that I had the ability to deduct this, not directly from my taxes, I was able to deduct it from my income. 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 equivalent 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 essentially saved $3,500. I did not conserve $10,000. So, another way to think of 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 deducting it from the income that you report to the Internal Revenue Service. If there's something that you could really take directly from your taxes, that's called a tax credit - how do second mortgages work in ontario. So, if you were, uh, if there was some unique thing that you could really deduct it directly 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 really calculated in that month just how much of a tax deduction do you get. So, for example, 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 presumptions, 35 percent of $1,700.
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So, roughly throughout the first year I'm going to conserve about $7,000 in taxes, so that's absolutely nothing, absolutely nothing to sneeze at. Anyhow, ideally you discovered this practical and I motivate you to go to that spreadsheet and, uh, have fun with the assumptions, only the presumptions in this brown color unless you really know what you're making with the spreadsheet.
What I want to do with this video is discuss what a mortgage is but I think the majority of us have a least a general sense of it. However even much better than that in fact go into the numbers and comprehend a little bit of what you are really doing when you're paying a home mortgage, what it's comprised of and how much of it is interest versus just how much of it is in fact paying down the loan - how do reverse mortgages work.