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Now, what I've done here is, well, actually before I get to the chart, let me in fact reveal you how I determine the chart and I do this throughout 30 years and it passes month. So, so you can picture that there's in fact 360 rows here on the real spreadsheet and you'll see that if you go and open it up. when to refinance mortgages.
So, on month zero, which I do not show here, you borrowed $375,000. Now, over the course of that month they're going to charge you 0.46 percent interest, bear in mind that was 5.5 percent divided by https://zenwriting.net/cillenb3o0/b-table-of-contents-b-a-r2jw 12. 0.46 percent interest on $375,000 is $1,718.75. So, I have not made any home mortgage payments yet.
So, now before I pay any of my payments, rather of owing $375,000 at the end of the 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 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 gone up by exactly $410. Now, you're most likely stating, hi, gee, I made a $2,000 payment, a roughly a $2,000 payment and my equity only went up by $410,000.
So, that really, in the beginning, your payment, your $2,000 payment is primarily interest. Only $410 of it is primary. However as you, and after that you, and after that, so as your loan balance goes down 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 mortgage once again. This is my brand-new loan balance. And notification, currently by month 2, $2.00 more went to primary 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 principal parts of our home mortgage payment. So, this entire height right here, this is, let me scroll down a bit, this is by month. So, this whole height, if you discover, this is the precise, this is precisely our mortgage payment, this $2,129 (reverse mortgages how they 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 in fact pay down the principal, the actual loan quantity.
Many of it went for the interest of the month. But as I start paying down the loan, as the loan balance gets smaller 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 really goes to pay off the loan.
Now, the last thing I want to discuss in this video without making it too long is this idea of a interest tax reduction. So, a great deal of times you'll hear monetary organizers or realtors tell you, hey, the benefit of purchasing your house is that it, it's, it has tax benefits, 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 really clear with what deductible methods. So, let's for example, 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 beginning a lot of that is interest.
That $1,700 is tax-deductible. Now, as we go further and further each month I get a smaller and smaller tax-deductible portion of my actual home loan payment. Out here the tax deduction is in fact very small. As I'm getting ready to pay off my entire home mortgage and get the title of my home.
This does not mean, let's state that, let's state in one year, let's say in one year I paid, I do not understand, I'm going to make up a number, I didn't compute 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 say $10,000 went to interest. To say 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 roughly 35 percent on that $100,000.
Let's say, 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 just a rough estimate. Now, when you say 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 typically owed and only paid $25,000.
So, when I inform the IRS how much did I make this year, rather of saying, I made $100,000 I state that I made $90,000 because I had the ability to deduct this, not directly from my taxes, I had the ability to deduct 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 computed.
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 reduction, $10,000 of deductible interest, I essentially saved $3,500. I did not save $10,000. So, another method 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 real taxes.
You're subtracting it from the earnings that you report to the IRS. If there's something that you might really take directly from your taxes, that's called a tax credit. So, if you were, uh, if there was some special thing that you might actually subtract it straight from your credit, from your taxes, that's a tax credit, tax credit.
Therefore, in this spreadsheet I simply wish to reveal you that I really determined because 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 home loan payment. So, 35 percent of that, and I got the 35 percent as one of your assumptions, 35 percent of $1,700 - non-federal or chartered banks who broker or lend for mortgages must be registered with.
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So, approximately over the course of the very first year I'm going to conserve about $7,000 in taxes, so that's nothing, nothing to sneeze at. Anyway, hopefully you discovered this valuable and I encourage you to go to that spreadsheet and, uh, have fun with the assumptions, only the presumptions in this brown color unless you actually understand what you're finishing with wesleyan finance the spreadsheet.