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 good guy, I'm not going to default on my home get more info loan so I make that very first mortgage payment that we determined, 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 probably stating, hey, gee, I made a $2,000 payment, a roughly a $2,000 payment and my equity only increased by $410,000.
So, that really, in the start, your payment, your $2,000 payment is mainly interest. Only $410 of it is primary. However as you, and after that you, and then, so as your loan balance decreases 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 home mortgage once again. This is my new loan balance. And notice, already by month two, $2.00 more went to principal and $2.00 less went to interest. And throughout 360 months you're going to see 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 whole height right here, this is, let me scroll down a bit, this is by month. So, this whole height, if you notice, 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 only $400 of it, this is the $400, only $400 of it went to actually pay for the principal, the actual loan amount.
Many of it went for the interest of the month. But as I start paying down the loan, as the loan balance gets smaller and smaller, timeshare atlanta ga 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 state if we head out here, this is month 198, there, that last month there was less interest so more of my $2,100 actually 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 mortgages payments work). So, a lot of times you'll hear financial planners or realtors inform you, hey, the benefit of buying your house is that it, it's, it has tax benefits, and it does.
Your interest, not your entire payment. Your interest is tax deductible, deductible. And I want to be really 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 further and further monthly I get a smaller sized and smaller tax-deductible part of my actual home mortgage payment. Out here the tax reduction is actually extremely small. As I'm preparing yourself to settle my whole home mortgage and get the title of my house.
This does not 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 state in year one, year one, I pay, I pay $10,000 in interest, $10,000 in interest. how do reverse mortgages work after death.
And, however let's state $10,000 went to interest. To state 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 state, you know, if I didn't have this home mortgage I would pay 35 percent taxes which would be about $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 simply take it from the $35,000 that I would have usually owed and just 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 say that I made $90,000 because I was able to deduct this, not directly from my taxes, I was able 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 in fact get calculated.
Let's get the calculator. So, 90 times.35 amounts to $31,500. So, this will be equal 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 conserve $10,000. So, another way 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 subtracting it from the earnings that you report to the IRS. If there's something that you could really take straight from your taxes, that's called a tax credit - how do escrow accounts work for mortgages. So, if you were, uh, if there was some special thing that you might really deduct it straight from your credit, from your taxes, that's a tax credit, tax credit.
And so, in this spreadsheet I just desire to show you that I in fact computed in that month just how much of a tax reduction do you get. So, for example, just off of the very first month you paid $1,700 in interest of your $2,100 home mortgage payment. So, 35 percent of that, and I got the 35 percent as one of your presumptions, 35 percent of $1,700.
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So, approximately over the course of the first year I'm going to save about $7,000 in taxes, so that's nothing, nothing to sneeze at. Anyway, ideally you discovered this useful and I encourage you to go to that spreadsheet and, uh, have fun with the presumptions, just the presumptions in this brown color unless you truly understand what you're doing with the spreadsheet.
What I desire to do with this video is describe what a home loan is but I think many of us have a least a general sense of it. However even better than that actually 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 just how much of it is interest versus how much of it is actually paying down the loan - how do variable mortgages work in canada.