You're deducting it from the income that you report to the IRS. If there's something that you might in fact take straight from your taxes, that's called a tax credit. So, if you were, uh, if there was some unique thing that you might in fact deduct it straight from your credit, from your taxes, Additional info that's a tax credit, tax credit.
Therefore, in this spreadsheet I just wish to show you that I actually computed because 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 mortgage payment. So, 35 percent of that, and I got the 35 percent as one of your assumptions, 35 percent of $1,700.
So, roughly over the course of the very first year I'm going to conserve about $7,000 in taxes, so that's nothing, nothing to sneeze at. Anyhow, hopefully you discovered this handy and I motivate you to go to that spreadsheet and, uh, have fun with the presumptions, only the presumptions in this brown color unless you truly know what you're finishing with the spreadsheet.
What I wish to make with this video is explain what a home loan is however I think most of us have a least a basic sense of it. But even better than that in fact go into the numbers and comprehend a bit of what you are actually doing when you're paying a mortgage, what it's comprised of and just how much of it is interest versus how much of it is in fact paying down the loan.
Let's state that there is a home that I like, let's state that that is the home that I want to purchase. It has a rate tag of, let's say that I require to pay $500,000 to purchase that house, this is the seller of your house right here.
I want to buy it. I wish to purchase the home. This is me right here. And I've had the ability to save up $125,000. I have actually had the ability to save up $125,000 but I would actually like to reside in that house so I go to a bank, I go to a bank, get a new color for the bank, so that is the bank right there.
Bank, can you lend me the remainder of the quantity I require for that house, which is basically $375,000. I'm putting 25 percent down, this right, this right, this number right here, that is 25 percent of $500,000. So, I ask the bank, can I have a loan for the balance? Can I have a $375,000 loan? And the bank says, sure, you seem like, uh, uh, a great guy with a good task who has a great credit score.
We have to have that title of the house and when you pay off the loan we're going to provide you the title of your house. So what's going to occur here is we're going to have the loan is going to go to me, so it's $375,000, $375,000 loan.
However the title of the home, the document that states who in fact owns your home, so this is the house title, this is the title of the home, house, home title. It will not go to me. It will go to the bank, the home title will go from the seller, perhaps even the seller's bank, maybe they haven't settled their mortgage, it will go to the bank that I'm obtaining from.
So, this is the security right here. That is technically what a home loan is. This pledging of the title for, as the, as the security for the loan, that's what a mortgage is. And really it comes from old French, mort, means dead, dead, and the gage, implies promise, I'm, I'm a hundred percent sure I'm mispronouncing it, however it originates from dead pledge.
When I pay off the loan this promise of the title to the bank will pass away, it'll return to me. Which's why it's called a dead promise or a home loan. And most likely due to the fact that it comes from old French is the reason why we don't state mort gage. We state, home mortgage.
They're really referring to the mortgage, mortgage, the mortgage. And what I wish to do in the rest of this video is utilize a little screenshot from a spreadsheet I made to really reveal you the mathematics or really reveal you what your mortgage payment is going to. And you can download, you can download this spreadsheet at Khan Academy, khanacademy.org/downloads, downloads, slash home mortgage calculator, mortgage, or actually, even much better, simply go to the download, simply go to the downloads, downloads, uh, folder on your web browser, you'll see a bunch of files and it'll be the file called mortgage calculator, mortgage calculator, calculator dot XLSX.
But just go to this URL and after that you'll see all of the files there and after that you can just download http://lukaslcnk366.huicopper.com/how-does-timeshare-work this file if you want to have fun with it. However what it does here remains in this kind of dark brown color, these are the assumptions that you might input and that you can change these cells in your spreadsheet without breaking the entire spreadsheet.
I'm buying a $500,000 home. It's a 25 percent deposit, so that's the $125,000 that I had saved up, that I 'd talked about right over there. And then the, uh, loan amount, well, I have the $125,000, I'm going to need to borrow $375,000. It computes it for us and after that I'm going to get a quite plain vanilla loan.
So, thirty years, it's going to be a 30-year fixed rate home loan, repaired rate, fixed rate, which suggests the rate of interest will not change. We'll discuss that in a bit. This 5.5 percent that I am paying on my, on the cash that I borrowed will not alter throughout the thirty years.
Now, this little tax rate that I have here, this is to in fact determine, what is the tax savings of the interest reduction on my loan? And we'll talk about that in a second, we can disregard it in the meantime. And after that these other things that aren't in brown, you shouldn't tinker these if you actually do open up this spreadsheet yourself.
So, it's actually the yearly rates of interest, 5.5 percent, divided by 12 and the majority of home loan are intensified on a monthly basis. So, at the end of each month they see how much cash you owe and then they will charge you this much interest on that for the month.