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 hero, I'm not going to default on my home mortgage so I make that first home mortgage payment that we computed, that we calculated right over here.
Now, this right here, what I, little asterisk here, this is my equity now. So, keep in mind, I started 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 most likely saying, hey, gee, I made a $2,000 payment, an approximately a $2,000 payment and my equity just went up by $410,000.
So, that extremely, in the beginning, your payment, your $2,000 payment is mostly interest. Just $410 of it is principal. However as you, and after that 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 new prepayment balance. I pay my mortgage again. This is my brand-new loan balance. And notification, currently by month two, $2.00 more went to primary and $2.00 less went to interest. And throughout 360 months you're visiting that it's a real, large distinction.
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This is the interest and primary parts of our home mortgage 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 see, this is the precise, this is precisely our home mortgage payment, this $2,129. Now, on that extremely first month you saw that of my $2,100 just $400 of it, this is the $400, only $400 of it went to in fact pay down the principal, the real loan quantity.
The majority of it went for the interest of the month. However as I begin paying for the loan, as the loan balance gets smaller 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 say if we go out here, this is month 198, over there, that last month there was less interest so more of my $2,100 actually goes to settle 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 deduction (how do mortgages work). So, a great deal 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 entire payment. Your interest is tax deductible, deductible. And I wish to be really clear with what deductible means. So, let's for example, discuss the interest costs. 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 further and further each month I get a smaller sized and smaller tax-deductible portion of my actual mortgage payment. Out here the tax deduction is actually really little. As I'm preparing to pay off my whole home mortgage and get the title of my home.
This doesn't suggest, let's say that, let's say in one year, let's say in one year I paid, I don't understand, 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 commercial mortgages work.
And, but let's say $10,000 went to interest. To state this deductible, and let's say before this, let's state 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 say I was paying approximately 35 percent on that $100,000.
Let's say, you know, 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. Just, this is simply a rough estimate. Now, when you say 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 typically owed and only paid $25,000.
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So, when timeshare in tennessee I tell the IRS how much did I make this year, rather of saying, I made $100,000 I say that I made $90,000 due to the fact that I was able to deduct this, not directly from my taxes, I was able to deduct it from my earnings. So, now if I only Find out more 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 is equivalent 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 basically saved $3,500. I did not save $10,000. So, another way to believe about 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 might in fact take directly from your taxes, that's called a tax credit - how to reverse mortgages work. So, if you were, uh, if there was some unique thing that you might actually 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 actually computed because month 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 throughout the very first year I'm going to save about $7,000 in taxes, so that's absolutely nothing, absolutely nothing to sneeze at. Anyway, ideally you discovered this practical and I motivate you to go to that spreadsheet and, uh, have fun with the assumptions, only the presumptions in this brown color unless you actually understand what you're doing with the spreadsheet.
What I want to make with this video is describe what a home mortgage is however I think the majority of us have a least a general sense of it. However even better than that actually go into the numbers and understand a 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 how much of it is actually paying for the loan - how do mortgages work in canada.