You're deducting it from the income that you report to the IRS. If there's something that you might actually take directly from your taxes, that's called a Check over here tax credit. So, if you were, uh, if there was some special thing that you might actually subtract it straight from your credit, from your taxes, that's a tax credit, tax credit.
Therefore, in this spreadsheet I just wish to reveal you that I really computed in that month just how much of a tax reduction do you get. So, for instance, just off of the 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.
So, approximately throughout the first year I'm going to conserve about $7,000 in taxes, so that's absolutely nothing, nothing to sneeze at. Anyhow, ideally you discovered this valuable and I motivate you to go to that spreadsheet and, uh, play with the presumptions, just the presumptions in this brown color unless you actually understand what you're finishing with the spreadsheet.
What I want to make with this video is discuss what a home mortgage is however I believe the majority of us have a least a basic sense of it. However even much better than that actually enter into the numbers and understand a bit of what you are actually 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 in fact paying down the loan.
Let's state that there is a house that I like, let's say that that is the house that I want to acquire. It has a cost of, let's say that I require to pay $500,000 to buy that home, this is the seller of the home right here.
I want to purchase it. I would like to buy your house. This is me right here. And I have actually had the ability to save up $125,000. I have actually had the ability to save up $125,000 but I would really 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 rest of the amount I need for that home, 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 great job who has a great credit score.
We have to have that title of your home and as soon as you pay off the loan we're going to offer you the title of the home. So what's going to happen here is we're going to have the loan is going to go to me, so it's $375,000, $375,000 loan.
But the title of the home, the document that states who really owns the home, so this is the home title, this is the title of your house, home, 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, perhaps they have not paid off their mortgage, it will go to the bank that I'm obtaining from.
So, this is the security right https://caidenrjbe385.edublogs.org/2020/09/08/what-is-timeshare-property/ here. That is technically what a home loan is. This promising of the title for, as the, as the security for the loan, that's what a home loan is. And actually it comes from old French, mort, means dead, dead, and the gage, indicates promise, I'm, I'm a hundred percent sure I'm mispronouncing it, however it comes from dead promise.
When I pay off the loan this promise of the title to the bank will pass away, it'll return to me. And that's why it's called a dead promise or a home loan. And probably because it originates from old French is the reason that we don't state mort gage. We say, mortgage.
They're actually describing the home mortgage, home loan, the home loan. And what I want to carry out in the rest of this video is use a little screenshot from a spreadsheet I made to in fact show you the math or actually show you what your home loan payment is going to. And you can download, you can download this spreadsheet at Khan Academy, khanacademy.org/downloads, downloads, slash mortgage calculator, mortgage, or really, even better, simply go to the download, just 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 home mortgage calculator, mortgage calculator, calculator dot XLSX.
However simply go to this URL and after that you'll see all of the files there and after that you can simply download this file if you desire to have fun with it. But what it does here remains in this kind of dark brown color, these are the assumptions that you could input which you can alter these cells in your spreadsheet without breaking the entire spreadsheet.
I'm buying a $500,000 house. It's a 25 percent down payment, so that's the $125,000 that I had actually conserved up, that I 'd talked about right there. And then the, uh, loan amount, well, I have the $125,000, I'm going to have to obtain $375,000. It determines it for us and then I'm going to get a pretty plain vanilla loan.
So, 30 years, it's going to be a 30-year set rate mortgage, repaired rate, fixed rate, which implies the interest rate won't change. We'll discuss that in a bit. This 5.5 percent that I am paying on my, on the money that I obtained will not change over the course of 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 2nd, we can neglect it for now. And after that these other things that aren't in brown, you should not mess with these if you actually do open this spreadsheet yourself.
So, it's literally the annual interest rate, 5.5 percent, divided by 12 and a lot of mortgage are compounded on a monthly basis. So, at the end of each month they see just how much cash you owe and after that they will charge you this much interest on that for the month.