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 man, I'm not going to default on my home mortgage so I make that first home loan payment that we computed, 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 started 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 most likely saying, hi, gee, I made a $2,000 payment, an approximately a $2,000 payment and my equity just increased by $410,000.
So, that very, in the beginning, your payment, your $2,000 payment is mainly interest. Only $410 of it is primary. But as you, and after that you, and then, 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 loan again. This is my brand-new loan balance. And notification, already by month two, $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, 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 whole height, if you discover, this is the precise, this is exactly our mortgage payment, this $2,129. Now, on that really first month you saw that of my $2,100 just $400 of it, this is the $400, only $400 of it went to actually pay for the principal, the real loan amount.
The majority of it went for the interest of the month. But 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 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 want to speak about in this video without making it too long is this concept of a interest tax reduction (how do commercial mortgages work). So, a lot of times you'll hear monetary coordinators or real estate agents inform you, hey, the advantage of purchasing your home 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 want to be very clear with what deductible ways. So, let's for circumstances, speak about the interest charges. So, this whole time over 30 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 monthly I get a smaller and smaller sized tax-deductible portion of my real mortgage payment. Out here the tax deduction is really really little. As I'm preparing to settle westley patrick my entire home loan and get the title of my home.
This does not indicate, let's state that, let's state in one year, let's state in one year I paid, I don't understand, 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 mortgages work in monopoly.
And, however let's say $10,000 went to interest. To state 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 state I was paying approximately 35 percent on that $100,000.
Let's state, you know, if I didn't have this mortgage I would pay 35 percent taxes which would be about $35,000 in taxes for that year. Just, this is http://riverqqwv920.fotosdefrases.com/h1-style-clear-both-id-content-section-0-how-do-interest-rates-on-mortgages-work-questions-h1 just a rough quote. Now, when you say that $10,000 is tax-deductible, the interest is tax-deductible, that does not suggest that I can simply take it from the $35,000 that I would have typically owed and just paid $25,000.
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So, when I inform the IRS how much 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 straight from my taxes, I was able 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 actually get calculated.
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 basically saved $3,500. I did not save $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 conserve 35 percent of this in real taxes.
You're subtracting it from the income 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 - how do second mortgages work in ontario. So, if you were, uh, if there was some unique thing that you could actually deduct it directly from your credit, from your taxes, that's a tax credit, tax credit.
Therefore, in this spreadsheet I simply wish to show you that I in fact computed in that month how much of a tax deduction do you get. So, for example, just off of the very 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.
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So, roughly over the course of the very first year I'm going to save about $7,000 in taxes, so that's nothing, absolutely nothing to sneeze at. Anyway, hopefully you discovered this helpful and I encourage you to go to that spreadsheet and, uh, play with the assumptions, only the assumptions in this brown color unless you truly understand what you're finishing with the spreadsheet.
What I want to finish with this video is describe what a mortgage is however I believe most of us have a least a general sense of it. But even better than that really enter into the numbers and understand a little bit of what you are actually doing when you're paying a home mortgage, what it's made up of and how much of it is interest versus how much of it is really paying down the loan - how do mortgages work.