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Now, what I have actually done here is, well, really before 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 goes by month. So, so you can envision that there's in fact 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 no, which I don't reveal here, you obtained $375,000. Now, over siriusxm get started now the course of 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 have not made any home loan payments yet.
So, now before I pay any of my payments, instead of owing $375,000 at the end of the first month I owe $376,718. Now, I'm a good guy, I'm not going to default on my home 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, 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 most likely stating, hey, gee, I made a $2,000 payment, an approximately a $2,000 payment and my equity just increased by $410,000.
So, that very, in the start, your payment, your $2,000 payment is mostly interest. Just $410 of it is primary. But as you, and after that you, and after that, so as your loan https://beauiivp984.shutterfly.com/25 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 new prepayment balance. I pay my home loan once again. This is my brand-new loan balance. And notice, currently 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 a real, substantial distinction.
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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 little bit, this is by month. So, this entire height, if you see, this is the precise, this is precisely our mortgage payment, this $2,129 (how long are mortgages). 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 in fact pay down the principal, the real loan amount.
Many of it went for the interest of the month. However as I begin 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 much better color than that. There is less interest, let's state if we go out here, this is month 198, over 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 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 organizers or realtors tell you, hey, the benefit of purchasing your home is that it, it's, it has tax advantages, and it does. what does it mean when economists say that home buyers are "underwater" on their mortgages?.
Your interest, not your whole payment. Your interest is tax deductible, deductible. And I wish to be extremely clear with what deductible methods. So, let's for circumstances, discuss the interest charges. 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 great deal of that is interest.
That $1,700 is tax-deductible. Now, as we go further and further every month I get a smaller and smaller sized tax-deductible portion of my actual home mortgage payment. Out here the tax deduction is actually very small. As I'm preparing yourself to pay off my whole home mortgage and get the title of my house.
This does not mean, let's state that, let's say in one year, let's say in one year I paid, I don't understand, I'm going to comprise 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.
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And, but let's state $10,000 went to interest. To say this deductible, and let's state before this, let's state 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 say I was paying roughly 35 percent on that $100,000.
Let's state, 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. Just, this is simply a rough price quote. Now, when you state 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 generally owed and only 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 say that I made $90,000 due to the fact that I was able to subtract this, not directly from my taxes, I was able to subtract it from my earnings. So, now if I only made $90,000 and I, and this is I'm doing a gross oversimplification of how taxes really get calculated.
Let's get the calculator. So, 90 times.35 is equivalent 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 conserve $10,000. So, another method 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 earnings that you report to the IRS. If there's something that you might actually take directly 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 directly from your credit, from your taxes, that's a tax credit, tax credit.
And so, in this spreadsheet I simply want to show you that I actually calculated because month 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 home loan payment. So, 35 percent of that, and I got the 35 percent as one of your assumptions, 35 percent of $1,700 - which fico score is used for mortgages.
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So, roughly 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 handy and I encourage you to go to that spreadsheet and, uh, play with the presumptions, just the assumptions in this brown color unless you truly understand what you're finishing with the spreadsheet.