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Now, what I've done here is, well, in fact prior to I get to the chart, let me actually reveal you how I compute the chart and I do this over the course of thirty years and it passes month. So, so you can imagine that there's really 360 rows here on the real spreadsheet and you'll see that if you go and open it up. how mortgages work.
So, on month zero, which I don't show here, you obtained $375,000. Now, over the course of that month they're going to charge you 0.46 percent interest, bear 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 mortgage payments yet.
So, now before I pay any of my payments, rather of owing $375,000 Informative post 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 mortgage so I make that very first home mortgage payment that we calculated, that we determined right over here.
Now, this right here, what I, little asterisk here, this is my equity now. So, keep in mind, 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 gone up by precisely $410. Now, you're most likely saying, hello, gee, I made a $2,000 payment, a roughly a $2,000 payment and my equity only increased by $410,000.
So, that very, in the start, your payment, your $2,000 payment is primarily interest. Only $410 of it is principal. However as you, and then you, and after that, so as your loan balance goes down you're going to pay less interest here and so http://garretthfxr713.iamarrows.com/how-did-subprime-mortgages-contributed-to-the-financial-crisis-things-to-know-before-you-buy 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 home loan again. This is my 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 going to see that it's a real, sizable difference.
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This is the interest and primary portions of our mortgage payment. So, this entire height right here, this is, let me scroll down a bit, this is by month. So, this entire height, if you see, this is the exact, this is exactly our mortgage payment, this $2,129 (when to refinance mortgages). 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 actually pay down the principal, the real loan amount.
The majority of it went for the interest of the month. However as I begin paying for 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 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 in fact goes to pay off 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. So, a lot of times you'll hear financial coordinators or realtors inform you, hey, the advantage of purchasing your home is that it, it's, it has tax benefits, and it does. how do reverse mortgages work.
Your interest, not your entire payment. Your interest is tax deductible, deductible. And I wish to be very clear with what deductible ways. So, let's for circumstances, 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 lot of that is interest.
That $1,700 is tax-deductible. Now, as we go even more and further each month I get a smaller and smaller sized tax-deductible part of my actual home mortgage payment. Out here the tax deduction is in fact extremely small. As I'm preparing yourself to pay off my whole home mortgage and get the title of my house.
This doesn't imply, 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 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 state prior to this, let's say 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 home mortgage I would pay 35 percent taxes which would be about $35,000 in taxes for that year. Simply, this is just a rough price quote. Now, when you state that $10,000 is tax-deductible, the interest is tax-deductible, that does not imply that I can simply take it from the $35,000 that I would have usually owed and just paid $25,000.
So, when I inform the Internal Revenue Service how much did I make this year, instead of saying, 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 really get determined.
Let's get the calculator. So, 90 times.35 amounts 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 essentially saved $3,500. I did not save $10,000. So, another way to think about 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 real taxes.
You're deducting it from the income that you report to the IRS. If there's something that you might in fact take straight from your taxes, that's called a tax credit. So, if you were, uh, if there was some special thing that you might actually deduct it directly from your credit, from your taxes, that's a tax credit, tax credit.
And so, in this spreadsheet I simply wish to show you that I in fact determined in that month how much of a tax deduction do you get. So, for example, simply off of the very first month you paid $1,700 in interest of your $2,100 home loan payment. So, 35 percent of that, and I got the 35 percent as one of your presumptions, 35 percent of $1,700 - what is the current interest rate for mortgages.
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So, roughly throughout the 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 practical and I encourage you to go to that spreadsheet and, uh, play with the presumptions, only the presumptions in this brown color unless you actually understand what you're doing with the spreadsheet.