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Now, what I have actually done here is, well, really prior to I get to the chart, let me in fact show you how I compute the chart and I do this over the course of 30 years and it goes by 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. what are mortgages.
So, on month no, which I don't show here, you obtained $375,000. Now, over the course of 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 have not made any 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 great person, I'm not going to default on my home loan so I make that very 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 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 gone up by precisely $410. Now, you're probably saying, hey, gee, I made a $2,000 payment, an approximately a $2,000 payment and my equity just increased by $410,000.
So, that really, in the start, your payment, your $2,000 payment is primarily interest. Just $410 of it is principal. But as you, and then you, and then, 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 new prepayment balance. I pay my mortgage once again. This is my brand-new loan balance. And notice, 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 an actual, large difference.
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This is the interest and principal parts 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 whole height, if you see, this is the precise, this is exactly our home mortgage payment, this $2,129 (why do mortgages get sold). Now, on that extremely first month you saw that of my $2,100 just $400 of it, this is the $400, just $400 of it went to in fact pay for the principal, the actual loan amount.
Most of it opted for the interest of the month. But as I begin paying down Continue reading 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, over there, that last month there was less interest so more of my $2,100 in fact goes to settle 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 deduction. So, a lot of times you'll hear monetary coordinators or real estate agents tell you, hey, the advantage of buying your home is that it, it's, it has tax benefits, and it does. how do reverse mortgages work.
Your interest, not your entire payment. Your interest is tax deductible, deductible. And I wish to be really clear with what deductible ways. So, let's for example, talk about the interest costs. So, this whole time 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.
That $1,700 is tax-deductible. Now, as we go further and even more each month I get a smaller sized and smaller sized tax-deductible part of my actual home mortgage payment. Out here the tax reduction is actually really small. As I'm preparing to settle my whole home loan and get the title of my home.
This doesn't suggest, let's state that, let's state in one year, let's say in one year I paid, I do not know, I'm going to make up a number, I didn't calculate it on the spreadsheet. Let's say 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 prior to this, let's say 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 approximately 35 percent on that $100,000.
Let's say, you know, 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 quote. Now, when you state that $10,000 is tax-deductible, the interest is tax-deductible, that does not imply that I can simply take it from the $35,000 that I would have generally owed and only paid $25,000.
So, when I tell the IRS how much did I make this year, rather of stating, I made $100,000 I state that I made $90,000 since I was able to deduct this, not directly from my taxes, I was able to subtract it from my earnings. So, now if I just made $90,000 and I, and this is I'm doing a gross oversimplification of Click for info how taxes actually get computed.
Let's get the calculator. So, 90 times.35 is equivalent 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 essentially 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 actual taxes.
You're deducting it from the income that you report to the Internal Revenue Service. 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 unique thing that you might actually subtract it directly from your credit, from your taxes, that's a tax credit, tax credit.
Therefore, in this spreadsheet I just want to reveal you that I in fact determined in that month how much of a tax reduction do you get. So, for instance, 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 presumptions, 35 percent of $1,700 - why are reverse mortgages bad.
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So, approximately throughout the very first year I'm going to save about $7,000 in taxes, so that's nothing, nothing to sneeze at. Anyway, ideally you found this valuable 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 truly know what you're doing with the spreadsheet.