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 a hero, I'm not going to default on my mortgage 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 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 gone up by exactly $410. Now, you're probably stating, 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 really, in the beginning, your payment, your $2,000 payment is mainly interest. Just $410 of it is principal. But as you, and after that you, and after that, 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 new prepayment balance. I pay my home loan again. http://dominicktdbu213.lowescouponn.com/h1-style-clear-both-id-content-section-0-explain-how-mortgages-work-balance-from-fiance-owed-fundamentals-explained-h1 This is my brand-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, sizable difference.
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This is the interest and principal parts of our mortgage payment. So, this whole height right here, this is, let me scroll down a bit, this is by month. So, this whole height, if you see, this is the precise, this is precisely our home loan payment, this $2,129. Now, on that really first month you saw that of my $2,100 just $400 of it, this is the $400, just $400 of it went to really pay down the principal, the real loan quantity.
The majority of it opted for the interest of the month. However as I begin paying for the loan, as the loan balance gets smaller sized and smaller, each of my payments, there's less Click here! interest to pay, let me do a better color than that. There is less interest, let's say 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 discuss in this video without making it too long is this idea of a interest tax deduction (how do commercial mortgages work). So, a great deal of times you'll hear monetary planners or realtors inform you, hey, the advantage of purchasing your house is that it, it's, it has tax advantages, and it does.
Your interest, not your entire payment. Your interest is tax deductible, deductible. And I desire to be very clear with what deductible ways. So, let's for example, 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 beginning a lot of that is interest.
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That $1,700 is tax-deductible. Now, as we go further and further every month I get a smaller and smaller sized tax-deductible part of my actual home loan payment. Out here the tax reduction is in fact really little. As I'm preparing yourself to settle my entire home loan and get the title of my home.
This doesn't suggest, let's say that, let's say in one year, let's say in one year I paid, I don't know, I'm going to make up a number, I didn't compute it on the spreadsheet. Let's say in year one, year one, I pay, I pay $10,000 in interest, $10,000 in interest. how do second mortgages work in ontario.
And, however let's state $10,000 went to interest. To state this deductible, and let's say before 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 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. 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 just take it from the $35,000 that I would have usually owed and just paid $25,000.
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So, when I inform the Internal Revenue Service just how much did I make this year, rather of saying, I made $100,000 I state that I made $90,000 due to the fact that I was able to deduct this, not straight from my taxes, I was able to subtract 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 in fact get determined.
Let's get the calculator. So, 90 times.35 is equal 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 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 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 in fact take straight from your taxes, that's called a tax credit - how do canadian mortgages work. So, if you were, uh, if there was some special thing that you might actually deduct it straight from your credit, from your taxes, that's a tax credit, tax credit.
And so, in this spreadsheet I just wish to reveal you that I actually calculated because month just how much of a tax reduction do you get. So, for example, just off of the very first month you paid $1,700 in interest of your $2,100 home 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 throughout the very first year I'm going to save about $7,000 in taxes, so that's absolutely nothing, nothing to sneeze at. Anyhow, hopefully you found this helpful and I encourage you to go to that spreadsheet and, uh, play with the assumptions, only the assumptions in this brown color unless you truly understand what you're making with the spreadsheet.
What I wish to finish with this video is describe what a home mortgage is however I believe most of us have a least a general sense of it. However even better than that actually enter into the numbers and understand a bit of what you are really doing when you're paying a home loan, what it's made up of and just how much of it is interest versus just how much of it is really paying for the loan - how do reverse mortgages work in florida.