You're deducting it from the income 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. So, if you were, uh, if there was some unique thing that you might really subtract it straight from your credit, from your taxes, that's a tax credit, tax credit.
Therefore, in this spreadsheet I simply desire to reveal you that I actually computed in that month just how much of a tax deduction do you get. So, for instance, simply off of the 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 assumptions, 35 percent of $1,700.
So, approximately throughout the very first year I'm going to conserve about $7,000 in taxes, so that's nothing, absolutely nothing to sneeze at. Anyway, hopefully you found this practical and I encourage you to go to that spreadsheet and, uh, have fun with the presumptions, just the presumptions in this brown color unless you really understand what you're finishing with the spreadsheet.
What I want to make with this video is describe what a mortgage is but I think most of us have a least a basic sense of it. But even better than that really go into the numbers and understand a bit of what you are really doing when you're paying a home mortgage, what it's made up of and just how much of it is interest versus just how much of it is really paying down the loan.
Let's state that there is a house that I like, let's state that that is your home that I would like to acquire. It has a price tag of, let's say that I need to pay $500,000 to buy that house, this is the seller of your house right here.
I want to buy it. I would like to purchase your home. This is me right here. And I have actually https://diigo.com/0iej3g had the ability to save up $125,000. I have actually been able to save up $125,000 but I would actually like to reside in that home so I go to a bank, I go to a bank, get a brand-new color for the bank, so that is the bank right there.
Bank, can you lend me the remainder of the amount I need 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 states, sure, you look like, uh, uh, a great person with a good job who has a good credit rating.
We have to have that title of your house and once you settle the loan we're going to give 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 your home, the document that says who really owns your home, so this is the house title, this is the title of your home, home, house 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 haven't paid off their home mortgage, it will go to the bank that I'm borrowing from.
So, this is the security right here. That is technically what a home mortgage is. This vowing of the title for, as the, as the security for the loan, that's what a home loan is. And in fact it originates from old French, mort, indicates dead, dead, and the gage, means promise, I'm, I'm a hundred percent sure I'm mispronouncing it, but it originates from dead pledge.
Once I settle the loan this promise of the title to the bank will die, it'll come back to me. And that's why it's called a dead pledge or a mortgage. And most likely since it comes from old French is the reason that we do not state mort gage. We say, home loan.
They're really referring to the home mortgage, home mortgage, the home loan. And what I desire to carry out in the rest of this video is utilize a little screenshot from a spreadsheet I made to really reveal you the math or Website link in fact 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 actually, even better, just go to the download, simply go to the downloads, downloads, uh, folder on your web browser, you'll see a lot of files and it'll be the file called home mortgage calculator, mortgage calculator, calculator dot XLSX.
However just 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. However what it does here is in this kind of dark brown color, these are the presumptions that you might input and that you can alter these cells in your spreadsheet without breaking the entire spreadsheet.
I'm purchasing a $500,000 house. It's a 25 percent down payment, so that's the $125,000 that I had saved up, that I 'd talked about right there. And after that the, uh, loan quantity, well, I have the $125,000, I'm going to need to obtain $375,000. It computes it for us and then I'm going to get a quite plain vanilla loan.
So, thirty years, it's going to be a 30-year set rate home mortgage, repaired rate, repaired rate, which indicates the interest rate will not alter. We'll speak about that in a little bit. This 5.5 percent that I am paying on my, on the money that I borrowed will not change over the course of the 30 years.
Now, this little tax rate that I have here, this is to actually determine, what is the tax cost savings of the interest deduction on my loan? And we'll discuss that in a second, we can overlook it in the meantime. And then these other things that aren't in brown, you shouldn't mess with these if you actually do open up this spreadsheet yourself.
So, it's literally the annual rates of interest, 5.5 percent, divided by 12 and many mortgage loans are intensified on a monthly basis. So, at the end of every month they see how much money you owe and then they will charge you this much interest on that for the month.