So, now prior to I pay any of my payments, rather of owing $375,000 at the end of the very first month I owe $376,718. Now, I'm a hero, I'm not going to default on my home loan so I make that very first home mortgage payment that we computed, that we determined right over here.
Now, this right here, what how to cancel an llc 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 first payment I now have $125,410 in equity. So, my equity has increased by exactly $410. Now, you're probably stating, hey, 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 start, your payment, your $2,000 payment is primarily interest. Only $410 of it is primary. 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 brand-new prepayment balance. I pay my home mortgage once again. This is my new loan balance. And notification, currently 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 a real, substantial difference.
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This is the interest and principal parts of our home mortgage payment. So, http://marcobkkr921.huicopper.com/h1-style-clear-both-id-content-section-0-little-known-facts-about-how-do-uk-mortgages-work-h1 this whole 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 exactly our home loan 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 really pay down the principal, the real loan amount.
The majority of it chose the interest of the month. However as I begin 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 in fact goes to settle 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 deduction (how do mortgages work in canada). So, a lot of times you'll hear monetary coordinators or realtors inform you, hey, the benefit of buying your house 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 wish to be really clear with what deductible means. So, let's for circumstances, discuss the interest charges. So, this whole time over thirty 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 even more monthly I get a smaller and smaller tax-deductible part of my real home loan payment. Out here the tax deduction is really really little. As I'm preparing yourself to settle my whole home loan and get the title of my home.
This doesn't imply, let's say that, let's state in one year, let's state in one year I paid, I do not understand, 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 interest, $10,000 in interest. how do fixed rate mortgages work.
And, however let's state $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 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 understand, if I didn't have this home mortgage 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 price 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 normally owed and only paid $25,000.
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So, when I tell the Internal Revenue Service how much did I make this year, instead of saying, I made $100,000 I say that I made $90,000 since I had the ability to deduct this, not directly from my taxes, I was able to deduct it from my income. 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 determined.
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 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 real taxes.
You're deducting it from the income that you report to the Internal Revenue Service. If there's something that you could really take directly from your taxes, that's called a tax credit - what are reverse mortgages and how do they work. So, if you were, uh, if there was some unique thing that you could really subtract it directly 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 in that 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 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, approximately throughout the very first year I'm going to save about $7,000 in taxes, so that's absolutely nothing, nothing to sneeze at. Anyway, hopefully you discovered this useful 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 really know what you're making with the spreadsheet.
What I wish to finish with this video is describe what a mortgage is but I believe the majority of us have a least a basic sense of it. However even much better than that in fact enter into the numbers and understand a little bit of what you are in fact doing when you're paying a home loan, what it's made up of and how much of it is interest versus how much of it is in fact paying down the loan - how do cash back mortgages work in canada.