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Now, what I have actually done wesley financial group llc here is, well, actually prior to I get to the chart, let me actually show you how I calculate the chart and I do this throughout 30 years and it goes by month. So, so you can think of that there's really 360 rows here on the actual spreadsheet and you'll see that if you go and open it up. what are reverse mortgages.
So, on month no, which I don't show here, you obtained $375,000. Now, throughout 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 loan 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 mortgage so I make that first mortgage payment that we determined, that we determined right over here.
Now, this right here, what I, little asterisk here, this is my equity now. So, remember, 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 increased by precisely $410. Now, you're probably saying, hello, gee, I made a $2,000 payment, an approximately a $2,000 payment and my equity just went up by $410,000.
So, that extremely, in the start, your payment, your $2,000 payment is mainly interest. Only $410 of it is primary. However as you, and after that you, and then, so as your loan balance decreases you're going to pay less interest here and so 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, already by month two, $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, large difference.
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This is the interest and principal portions of our mortgage 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 see, this is the specific, this is precisely our mortgage payment, this $2,129 (how do second mortgages work). Now, on that extremely 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 for the principal, the actual loan quantity.
Many of it chose the interest of the month. But as I begin paying down the loan, as the loan balance gets smaller sized and smaller, each of my payments, there's less interest west financial group to pay, let me do a much better color than that. There is less interest, let's state if we head out here, this is month 198, there, that last month there was less interest so more of my $2,100 really goes to settle the loan.
Now, the last thing I wish to talk about in this video without making it too long is this concept of a interest tax reduction. So, a great deal of times you'll hear monetary planners or realtors inform you, hey, the benefit of purchasing your house is that it, it's, it has tax benefits, and it does. what are subprime mortgages.
Your interest, not your entire payment. Your interest is tax deductible, deductible. And I wish to be extremely clear with what deductible means. So, let's for instance, speak about the interest charges. So, this entire 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 further and further every month I get a smaller sized and smaller sized tax-deductible portion of my real home mortgage payment. Out here the tax deduction is actually really little. As I'm getting prepared to pay off my whole home mortgage and get the title of my house.
This does not imply, let's say that, let's say in one year, let's say 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.
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And, however let's state $10,000 went to interest. To state this deductible, and let's state before this, let's state 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 say I was paying approximately 35 percent on that $100,000.
Let's say, you know, if I didn't have this 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 suggest that I can simply take it from the $35,000 that I would have typically owed and only paid $25,000.
So, when I tell 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 because I was able to deduct 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 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 basically saved $3,500. I did not conserve $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 save 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 really take straight from your taxes, that's called a tax credit. So, if you were, uh, if there was some unique thing that you might really subtract it directly from your credit, from your taxes, that's a tax credit, tax credit.
And so, in this spreadsheet I simply wish to reveal you that I really computed in that month how much of a tax deduction do you get. So, for example, just off of the 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 assumptions, 35 percent of $1,700 - how reverse mortgages work.
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So, approximately over the course of the very first year I'm going to save about $7,000 in taxes, so that's 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 actually understand what you're making with the spreadsheet.