So, now prior to 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 an excellent guy, I'm not going to default on my mortgage so I make that first home 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 gone up by precisely $410. Now, you're most likely 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 really, 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 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 brand-new prepayment balance. I pay my mortgage again. This is my new loan balance. And notification, 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 a real, substantial 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 little bit, this is by month. So, this entire height, if you see, this is the specific, this is precisely our home loan 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 actually pay for the principal, the actual loan amount.
Most of it chose the interest of the month. But as I start paying down 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 much better color than that. There is less interest, let's say 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 wish to discuss in this video without making it too long is this idea of a interest tax reduction (how do buy to rent mortgages work). So, a lot of times you'll hear monetary coordinators or real estate agents tell you, hey, the benefit 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 desire to be extremely clear with what deductible means. So, let's for instance, speak about the interest fees. So, this whole time sellmy timeshare over 30 years I am paying $2,100 a month or $2,129.29 a month. Now, at the beginning a great deal of that is interest.
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That $1,700 is tax-deductible. Now, as we go further and further every month I get a smaller sized and smaller tax-deductible part of my real home loan payment. Out here the tax deduction is actually very little. As I'm preparing yourself to pay off my whole 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 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. how do home mortgages work.
And, but let's state $10,000 went to interest. To say this deductible, and let's say prior to this, let's state prior to this I was making $100,000. http://marcobkkr921.huicopper.com/h1-style-clear-both-id-content-section-0-things-about-how-do-right-to-buy-mortgages-work-h1 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 understand, 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. Simply, this is just a rough quote. 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 usually owed and just paid $25,000.
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So, when I tell 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 was able to deduct this, not straight from my taxes, I was able to deduct 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 in fact get computed.
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 deduction, $10,000 of deductible interest, I basically conserved $3,500. I did not save $10,000. So, another way to consider 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 income that you report to the Internal Revenue Service. If there's something that you could actually take directly from your taxes, that's called a tax credit - how do adjustable rate mortgages work. So, if you were, uh, if there was some unique thing that you could actually subtract it directly from your credit, from your taxes, that's a tax credit, tax credit.
And so, in this spreadsheet I just want to show you that I in fact computed because month just how much of a tax reduction do you get. So, for instance, simply off of the very 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, approximately throughout the first year I'm going to save about $7,000 in taxes, so that's absolutely nothing, nothing to sneeze at. Anyway, ideally you discovered this practical 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 know what you're doing with the spreadsheet.
What I want to finish with this video is describe what a home mortgage is but I believe the majority of us have a least a general sense of it. But even much better than that in fact enter into the numbers and understand a bit of what you are really 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 down the loan - how do mortgages payments work.