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Now, what I've done here is, well, in fact before I get to the chart, let me actually show you how I determine the chart and I do this throughout thirty years and it goes by month. So, so you can imagine that there's in fact 360 rows here on the real spreadsheet and you'll see that if you go and open it up. what is a fixed rate mortgages.
So, on month no, which I do not reveal here, you obtained $375,000. Now, over 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 haven't made any home mortgage payments yet.
So, now prior to 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 home loan so I make that very first home loan 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 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, a roughly a $2,000 payment and my equity just increased by $410,000.
So, that very, in the beginning, your payment, your $2,000 payment is mainly interest. Only $410 of it is principal. However 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 mortgage cancel your timeshare again. This is my new loan balance. And notice, currently by month 2, $2.00 more went to principal and $2.00 less went to interest. And throughout 360 months you're visiting that it's a real, large 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 bit, this is by month. So, this entire height, if you observe, this is the precise, this is exactly our home mortgage payment, this $2,129 (how reverse mortgages work). Now, on that really first month you saw that of my $2,100 only $400 of it, this is the $400, just $400 of it went to in fact pay down the principal, the actual loan amount.
The majority of it opted for the interest of the month. However as I start 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 is less interest, let's state if we go 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. So, a lot of times you'll hear monetary planners or realtors tell you, hey, the benefit of purchasing your house is that it, it's, it has tax benefits, and it does. what are reverse mortgages.
Your interest, not your entire payment. Your interest is tax deductible, deductible. And I wish to be really clear with what deductible means. So, let's for circumstances, talk about the interest fees. So, this entire time over 30 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 even more and further every month I get a smaller sized and smaller sized tax-deductible part of my real mortgage payment. Out here the tax deduction is really really little. As I'm preparing yourself to pay off my whole home loan and get the title of my home.
This doesn't mean, let's state that, let's state in one year, let's say in one year I paid, I do not know, I'm going to comprise a number, I didn't determine 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 prior to this, let's say before 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 have to do with $35,000 in taxes for that year. Simply, this is just a rough estimate. Now, when you state that $10,000 is tax-deductible, the interest is tax-deductible, that does not indicate that I can simply take it from http://edgarjlss664.lowescouponn.com/h1-style-clear-both-id-content-section-0-how-are-mortgages-compounded-can-be-fun-for-everyone-h1 the $35,000 that I would have usually owed and just paid $25,000.
So, when I tell the Internal Revenue Service 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 subtract this, not straight from my taxes, I had the ability to deduct 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 in fact get calculated.
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 conserved $3,500. I did not save $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 save 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 really 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 really 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 computed because month just how much of a tax reduction do you get. So, for instance, simply off of the 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 - how mortgages work.
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So, roughly over the course of the very first year I'm going to conserve about $7,000 in taxes, so that's absolutely nothing, absolutely nothing to sneeze at. Anyhow, hopefully you discovered this valuable and I motivate you to go to that spreadsheet and, uh, have fun with the assumptions, just the assumptions in this brown color unless you really understand what you're doing with the spreadsheet.