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Now, what I have actually done here is, well, really before I get to the chart, let me in fact reveal you how I compute the chart and I do this throughout 30 years and it goes by month. So, so you can think of that there's in fact 360 rows here on the actual spreadsheet and you'll see that if you go and open it up. how do second mortgages work.
So, on month no, which I don't show here, you borrowed $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 home mortgage payments yet.
So, now prior to I pay any of my payments, instead of owing $375,000 at the end of the very first month I owe Helpful resources $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 actually increased by exactly $410. Now, you're most likely 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 very, in the start, your payment, your $2,000 payment is primarily interest. Just $410 of it is primary. 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 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, sizable difference.
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This is the interest and primary portions of our mortgage payment. So, 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 precise, this is exactly our home mortgage payment, this $2,129 (when to refinance mortgages). 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 actual loan quantity.
The majority of it opted for the interest of the month. However as I begin paying for 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 better color than that. There is less interest, let's state if we go out here, this is month 198, 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 desire to talk about 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 organizers or real estate agents tell you, hey, the advantage of buying your house is that it, it's, it has tax advantages, and it does. what are reverse mortgages.
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, speak about the interest charges. So, this entire time over thirty 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.
That $1,700 is tax-deductible. Now, as we go further and further every month I get a smaller sized and smaller sized tax-deductible portion of my real home loan payment. Out here the tax deduction is really extremely little. As I'm getting all set to pay off my whole home loan and get the title of my house.
This does not suggest, let's state that, let's say in one year, let's state in one year I paid, I don't know, I'm going to comprise a number, I didn't compute 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 before this, let's state 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 say I was paying approximately 35 percent on that $100,000.
Let's say, 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. Just, this is just 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 simply take it from the $35,000 that I would have typically owed and just paid $25,000.
So, when I inform the IRS 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 straight from my taxes, I was able to subtract it from my income. 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 computed.
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 conserve $10,000. So, another way to think about 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 actual taxes.
You're subtracting it from the earnings that you report to the IRS. If there's something that you could really take directly from your taxes, that's called a tax credit. So, if you were, uh, if there was some special 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 simply desire to show you that I in fact 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 mortgage payment. So, 35 percent of that, and I got the 35 percent as one of your presumptions, 35 percent of $1,700 - how to sell mortgages.
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So, roughly throughout the first year I'm going to save about $7,000 in taxes, so that's nothing, absolutely nothing to sneeze at. Anyway, hopefully you discovered this helpful and I encourage you to go to that spreadsheet and, uh, have fun with the presumptions, only the assumptions in this brown color unless you actually understand what you're finishing with the spreadsheet.