So, now before I pay any of my payments, rather of owing $375,000 at the end of the very first month I owe $376,718. Now, I'm an excellent guy, I'm not going to default on my home mortgage so I make that very first mortgage payment that we determined, 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 actually increased by precisely $410. Now, you're probably saying, hello, gee, I made a $2,000 payment, a roughly a $2,000 payment and my equity just went up by $410,000.
So, that very, in the beginning, your payment, your $2,000 payment is mostly 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 and so 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 mortgage 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 throughout 360 months you're visiting that it's an actual, substantial difference.
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This is the interest and primary parts of our home 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. Now, on that extremely first month you saw that of my $2,100 only $400 of it, this is the $400, only $400 of it went to in fact pay down the principal, the actual loan quantity.
The majority 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 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 want to talk about in this video without making it too long is this concept of a interest tax deduction (how mortgages work). So, a great deal of times you'll hear monetary organizers or real estate agents tell you, hey, the advantage of purchasing your house is that it, it's, it has tax benefits, and it does.
Your interest, not your whole payment. Your interest is tax deductible, deductible. And I wish to be extremely clear with what deductible means. So, let's for example, talk 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 starting a lot of that is interest.
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That $1,700 is tax-deductible. Now, as we go even more and further every month I get a smaller and smaller tax-deductible part of my real home mortgage payment. Out here the tax deduction is actually very little. As I'm getting ready to pay off my entire home mortgage and get the title of my house.
This does not suggest, let's say that, let's say in one year, let's state in one year I paid, I do not know, I'm going to make up 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. how do 2nd mortgages work.
And, however let's state $10,000 went to interest. To say this deductible, and let's say before 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 be about $35,000 in taxes for that year. Simply, 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 imply that I can just take it from the $35,000 that I would have generally owed and only paid $25,000.
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So, when I tell the IRS just how much More help did I make this year, rather of stating, I made $100,000 I state that I made $90,000 because I had the ability to subtract this, not directly from my taxes, I was able 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 determined.
Let's get the calculator. So, 90 times.35 amounts to $31,500. So, this will amount to $31,500, put a comma here, $31,500. So, off of a $10,000 deduction, $10,000 of deductible interest, I basically conserved $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 save 35 percent of this in real taxes.
You're subtracting it from the earnings that you report to the Internal Revenue Service. If there's something that you could actually take straight from your taxes, that's called a tax credit - how do mortgages work in monopoly. So, if you were, uh, if there was some special thing that you might in fact deduct it straight from your credit, from your taxes, that's a tax credit, tax credit.
Therefore, in this spreadsheet I just desire to reveal you that I really computed in that month just 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.
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So, roughly throughout the first year I'm going to save about $7,000 in taxes, so that's absolutely nothing, nothing to sneeze at. Anyway, hopefully you found this practical and I encourage you to go to that spreadsheet and, uh, have fun with the assumptions, just the assumptions in this brown color unless you actually understand what you're making with the spreadsheet.
What I desire to make with this video is describe what a home loan is however I think the majority of us have a least a basic sense of it. But even better than that actually enter into the numbers and comprehend a bit of what you are in fact doing when you're paying a home loan, what it's comprised of and just how much of it is interest versus just how much of it is really paying for the loan - what are reverse mortgages and how do they work.