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Now, what I've done here is, well, really prior to I get to the chart, let me actually show you how I determine the chart and I do this throughout thirty years and it goes by month. So, so you can picture that there's really 360 rows here on the actual spreadsheet and you'll see that if you go and open it up. reverse mortgages how they work.
So, on month absolutely no, which I do not reveal here, you obtained $375,000. Now, throughout that month they're going to charge you 0.46 percent interest, keep in mind that was 5.5 percent divided by 12. 0.46 percent interest on $375,000 is $1,718.75. So, I have not made any mortgage payments yet.
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 good guy, 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 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 exactly $410. Now, you're most likely saying, hi, 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 primarily interest. Only $410 of it is principal. But as you, and then 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 notification, already by month 2, $2.00 more went to principal and $2.00 less went to interest. And throughout 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 loan payment. So, this entire 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 mortgage payment, this $2,129 (what is the current interest rate for commercial mortgages?). Now, on that really first month you saw that of my $2,100 only $400 of it, this is the $400, just $400 of it went to actually pay down the principal, the real loan amount.
Many of it opted for the interest of the month. But 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 state if we head out here, this is month 198, over there, that last month there was less interest so more of my $2,100 really goes to pay off the loan.
Now, the last thing I want to discuss in this video without making it too long is this concept of a interest tax reduction. So, a great deal of times you'll hear financial coordinators or realtors tell you, hey, the benefit of purchasing your house is that it, it's, it has View website tax advantages, and it does. what are reverse mortgages.
Your interest, not your whole payment. Your interest is tax deductible, deductible. And I wish to be extremely clear with what deductible ways. So, let's for example, speak 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.
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 portion of my real mortgage payment. Out here the tax reduction is in fact really little. As I'm preparing yourself to pay off my entire home mortgage and get the title of my house.
This does not mean, let's say that, let's state in one year, let's state 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.
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And, but let's state $10,000 went to interest. To say this deductible, and let's say 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 say 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 mean that I can just take it from the $35,000 that I would have typically owed and just paid $25,000.
So, when I tell the Internal Revenue Service just how much did I make this year, instead of saying, I made $100,000 I state that I made $90,000 since I was able to deduct this, not directly from my taxes, I had the ability to subtract it from my earnings. So, now if I only 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 amount 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 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 real taxes.
You're subtracting it from the earnings that you report to the Internal Revenue Service. If there's something that you could actually take straight from your taxes, that's called a tax credit. So, if you were, uh, if there was some special thing that you could really deduct it straight from your credit, from your taxes, that's a tax credit, tax credit.
And so, in this spreadsheet I just wish to show you that I actually determined in that month how much of a tax reduction do you get. So, for instance, 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 presumptions, 35 percent of $1,700 - which type of credit is usually used for cars.
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So, roughly throughout the first year I'm going to conserve about $7,000 in taxes, so that's absolutely nothing, absolutely nothing to sneeze at. Anyway, hopefully you found this useful and I motivate you to go to that spreadsheet and, uh, have fun with the sirius xm logo png presumptions, just the presumptions in this brown color unless you truly understand what you're making with the spreadsheet.