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Now, what I've done here is, well, in fact prior to I get to the chart, let me actually show you how I compute the chart and I do this over the course of 30 years and it passes month. So, so you can imagine that there's actually 360 rows here on the real spreadsheet and you'll see that if you go and open it http://garretthfxr713.iamarrows.com/how-did-subprime-mortgages-contributed-to-the-financial-crisis-things-to-know-before-you-buy up. reverse mortgages are most useful for elders who.
So, on month absolutely no, which I don't reveal here, you borrowed $375,000. Now, throughout that month they're going to charge you 0.46 percent interest, bear 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 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 a good guy, I'm not going to default on my home mortgage so I make that very first home loan payment that we calculated, that we computed right over here.
Now, this right here, what I, little asterisk here, this is my equity now. So, keep in mind, 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 precisely $410. Now, you're most likely stating, hi, gee, I made a $2,000 payment, an approximately a $2,000 payment and my equity just went up by $410,000.
So, that really, in the start, your payment, your $2,000 payment is primarily interest. Only $410 of it is principal. But as you, and then you, and after that, so as your loan 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 brand-new prepayment balance. I pay my home loan once again. This is my new loan balance. And notification, currently by month 2, $2.00 more went to principal and $2.00 less went to interest. And over the course of 360 months you're visiting that it's a real, substantial 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 little bit, this is by month. So, this entire height, if you observe, this is the specific, this is exactly our home mortgage payment, this $2,129 (which of the statements below is most correct regarding adjustable rate mortgages?). Now, on that very first month you saw that of my $2,100 only $400 of it, this is the $400, just $400 of it went to actually pay for the principal, the real loan amount.
Many of it opted for the interest of the month. However as I begin 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 head 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 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 coordinators or realtors inform you, hey, the benefit of purchasing your home is that it, it's, it has tax benefits, and it does. what are mortgages.
Your interest, not your entire payment. Your interest is tax deductible, deductible. And I wish to be extremely clear with what deductible methods. So, let's for circumstances, 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.
That $1,700 is tax-deductible. Now, as we go even more and further each month I get a smaller and smaller tax-deductible part of my real home mortgage payment. Out here the tax deduction is actually really small. As I'm getting prepared to settle my whole home mortgage and get the title of my home.
This doesn't imply, let's state that, let's state in one year, let's say in one year I paid, I don't know, I'm going to make up a number, I didn't determine 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 say prior to 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 state I was paying roughly 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. Just, this is just a rough price quote. Now, when you say that $10,000 is tax-deductible, the interest is tax-deductible, that does not mean that I can just take it from the $35,000 that I would have normally owed and just paid $25,000.
So, when I tell the Internal Revenue Service how much did I make this year, rather of stating, I made $100,000 I say that I made $90,000 due to the fact that I was able to deduct this, not straight from my taxes, I had the ability to subtract it from my income. So, now melanie rowland poynter 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 equal 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 conserve $10,000. So, another method to think 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 subtracting it from the earnings that you report to the Internal Revenue Service. If there's something that you could in fact 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 actually 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 show you that I in fact determined because month just how much of a tax reduction do you get. So, for example, simply 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 mortgages work.
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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, ideally you found this useful and I encourage you to go to that spreadsheet and, uh, play with the assumptions, only the presumptions in this brown color unless you truly understand what you're making with the spreadsheet.