So, now prior to I pay any of my payments, instead of owing $375,000 at the end of the first month I owe $376,718. Now, I'm an excellent man, I'm not going to default on my home mortgage so I make that first mortgage 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, remember, 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 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 only went up by $410,000.
So, that extremely, in the beginning, your payment, your $2,000 payment is mainly interest. Only $410 of it is principal. But as you, and after that 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 brand-new loan balance. And notice, 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 going to see that it's an actual, large distinction.
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This is the interest and principal parts of our home loan payment. So, this entire height right here, this is, let me scroll down a bit, this is by month. So, this entire height, if you discover, this is the exact, this is exactly our home 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, just $400 of it went to in fact pay down the principal, the real loan quantity.
Many of it chose 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 than that. There is less interest, let's state if we go 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 pay off the loan.
Now, the last thing I desire to discuss in this video without making it too long is this concept of a interest tax reduction (how do canadian mortgages work). So, a great deal of times you'll hear monetary organizers or real estate agents inform you, hey, the advantage of buying your house is that it, it's, it has tax advantages, and it does.
Your interest, not your entire payment. Your interest is tax deductible, deductible. And I wish to be really clear with what deductible means. So, let's for circumstances, talk about the interest fees. 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 great deal of that is interest.
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That $1,700 is tax-deductible. Now, as we go even more and further every month I get a smaller and smaller sized tax-deductible part of my real home loan payment. Out here the tax reduction is actually very little. As I'm getting prepared to pay off my whole mortgage and get the title of my home.
This doesn't imply, 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 make up 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 jobs with timeshare cancelation companies interest, $10,000 in interest. how do arm mortgages work.
And, but let's say $10,000 went to interest. To say this deductible, and let's state prior to this, let's say 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 say, you understand, 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 simply a rough price quote. Now, when you state 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 only paid $25,000.
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So, when I inform the Internal Revenue Service just how much did I make this year, rather of saying, I made $100,000 I say that I made $90,000 because I was able to subtract this, not directly from my taxes, I was able to deduct timeshare relief consultants 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 really get calculated.
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 reduction, $10,000 of deductible interest, I basically conserved $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 conserve 35 percent of this in real taxes.
You're subtracting it from the earnings that you report to the IRS. If there's something that you might in fact take straight from your taxes, that's called a tax credit - how do second mortgages work. So, if you were, uh, if there was some special thing that you could in fact 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 computed because month just how much of a tax reduction do you get. So, for instance, 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.
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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. Anyway, hopefully 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 really understand what you're making with the spreadsheet.
What I desire to do 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 much better than that in fact go into the numbers and comprehend a little bit of what you are actually doing when you're paying a home loan, what it's made up of and how much of it is interest versus just how much of it is really paying for the loan - how do reverse mortgages work after death.