You're deducting it from the income that you report to the IRS. If there's something that you could actually 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.
And so, in this spreadsheet I just desire to show you that I really calculated because month how much of a tax reduction do you get. So, for example, simply off of the very 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, roughly over the course of the very first year I'm going to conserve about $7,000 in taxes, so that's absolutely nothing, absolutely nothing to sneeze at. Anyway, hopefully you discovered this practical 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 really understand what you're making with the spreadsheet.
What I wish to make with this video is explain what a mortgage is however I think most of us have a least a general sense of it. But even better than that really enter into the numbers and comprehend a bit of what you are actually doing when you're paying a home loan, what it's made up of and 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 home that I like, let's say that that is the house that I wish to acquire. It has a price of, let's say that I need to pay $500,000 to buy that home, this is the seller of the home right here.
I want to purchase it. I wish to buy your home. This is me right here. And I've had the ability to save up $125,000. I've had the ability to conserve up $125,000 but I would truly like to reside in that house 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 provide 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 says, sure, you look like, uh, uh, a nice man with an excellent job who has a great credit rating.
We have to have that title of your home and as soon as you settle the loan we're going to offer you the title of your home. 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.
But the title of your house, the document that says who in fact owns your house, so this is the house title, this is the title of the house, house, house title. It will not go to me. It will go to the bank, the house title will go from the seller, perhaps even the seller's bank, maybe they haven't paid off their home loan, 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 mortgage is. And in fact it originates from old French, mort, means dead, dead, and the gage, means pledge, I'm, I'm a hundred percent sure I'm mispronouncing it, but it originates from dead promise.
Once I pay off the loan this pledge of the title to the bank will die, it'll return to me. And that's why it's called a dead pledge or a home mortgage. And probably due to the fact that it comes from old French is the reason we don't state mort gage. We say, home loan.
They're actually describing the mortgage, home mortgage, the mortgage loan. And what I want to do in the rest of this video is use a little screenshot from a spreadsheet I made to really reveal you the mathematics or really 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, home mortgage, or actually, even better, simply go to the download, just go to the downloads, downloads, uh, folder on your web internet browser, you'll see a bunch of files Great site and it'll be the file called home loan calculator, mortgage calculator, calculator dot XLSX.
However simply go to this URL and after that you'll see all of the files there and then you can just download this file if you wish to have fun with it. But what it does here remains in this sort of dark brown color, these are the assumptions 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 actually saved up, that I 'd discussed right there. And then the, uh, loan quantity, well, I have the $125,000, I'm going to have to obtain $375,000. It determines it for us and after that I'm going to get a quite plain vanilla loan.
So, 30 years, it's going to be a 30-year fixed rate home mortgage, repaired rate, repaired rate, which implies the rate of interest will not change. We'll speak about that in a little bit. This 5.5 percent that I am paying on my, on the money that I obtained 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 cost savings of the interest deduction on my loan? And we'll speak about that in a second, we can disregard it in the meantime. And then these other things that aren't in brown, you shouldn't mess with these if you https://www.openlearning.com/u/mcnicholas-qfwov9/blog/HowMuchDoesItCostToGetOutOfATimeshare/ actually do open this spreadsheet yourself.
So, it's actually the annual rates of interest, 5.5 percent, divided by 12 and many home loan are intensified on a month-to-month basis. So, at the end of each month they see how much cash you owe and after that they will charge you this much interest on that for the month.