So, now before I pay any of my payments, instead of owing $375,000 at the end of the very first month I owe $376,718. Now, I'm an excellent guy, I'm not going to default on my home loan so I make that first 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, keep in mind, 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 actually gone up by precisely $410. Now, you're probably 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 very, in the beginning, your payment, your $2,000 payment is mostly interest. Just $410 of it is primary. But as you, and after that you, and after that, 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 new prepayment balance. I pay my home mortgage again. This is my brand-new loan balance. And notice, https://penzu.com/p/810b234e currently by month 2, $2.00 more went to primary and $2.00 less went to interest. And over the course of 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 whole 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 home mortgage payment, this $2,129. Now, on that really first month you saw that of my $2,100 only $400 of it, this is the $400, only $400 of it went to really pay down the principal, the actual loan amount.
Many of it opted for the interest of the month. However as I start paying down the loan, as the loan balance gets smaller sized and smaller, each of my payments, there's less interest to pay, let me do a better color Click here for more 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 in fact goes to settle the loan.
Now, the last thing I wish to talk about in this video without making it too long is this idea of a interest tax reduction (how does chapter 13 work with mortgages). So, a lot of times you'll hear monetary planners or real estate agents tell you, hey, the benefit of buying your home is that it, it's, it has tax advantages, 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 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 great deal of that is interest.
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That $1,700 is tax-deductible. Now, as we go even more and even more each month I get a smaller and smaller tax-deductible part of my actual mortgage payment. Out here the tax reduction is really very little. As I'm preparing yourself to settle my whole home loan and get the title of my home.
This does not suggest, let's say that, let's say in one year, let's say 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 reverse mortgages work example.
And, however let's state $10,000 went to interest. To state this deductible, and let's state before 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 say, 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. Simply, this is just a rough estimate. Now, when you state that $10,000 is tax-deductible, the interest is tax-deductible, that does not imply that I can just take it from the $35,000 that I would have typically owed and only paid $25,000.
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So, when I inform the Internal Revenue Service how much did I make this year, instead of stating, I made $100,000 I state that I made $90,000 since I had the ability to deduct this, not directly from my taxes, I had the ability to deduct it from my earnings. 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 equivalent to $31,500. So, this will be equal to $31,500, put a comma here, $31,500. So, off of a $10,000 deduction, $10,000 of deductible interest, I essentially saved $3,500. I did not save $10,000. So, another method 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 real taxes.
You're deducting it from the earnings that you report to the IRS. If there's something that you could actually take directly from your taxes, that's called a tax credit - how mortgages work. So, if you were, uh, if there was some unique thing that you might really subtract it straight from your credit, from your taxes, that's a tax credit, tax credit.
And so, in this spreadsheet I just wish to reveal you that I in fact computed because 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 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, roughly throughout the very first year I'm going to save about $7,000 in taxes, so that's nothing, absolutely nothing to sneeze at. Anyhow, ideally you found 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 actually know what you're doing with the spreadsheet.
What I wish to make with this video is describe what a home mortgage is however I believe the majority of us have a least a general sense of it. However even better than that actually go into the numbers and comprehend a little bit of what you are in fact doing when you're paying a home loan, what it's comprised of and how much of it is interest versus just how much of it is actually paying for the loan - how do reverse mortgages really work.