You're subtracting it from the income that you report to the IRS. If there's something that you might actually take straight from your taxes, that's called a tax credit. So, if you were, uh, if there was some unique thing that you could in fact subtract it directly from your credit, from your taxes, that's a tax credit, tax credit.
And so, in this spreadsheet I simply wish to show you that I in fact computed in that month just how much of a tax reduction 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 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, ideally you discovered this handy and I motivate you to go to that spreadsheet and, uh, have fun with the assumptions, just the assumptions in this brown color unless you truly understand what you're finishing with the spreadsheet.
What I wish to make with this video is describe what a home loan is but I think most of us have a least a general sense of it. However even much better than that in fact go into the numbers and understand a bit of what you are in fact doing when you're paying a home mortgage, what it's comprised of and how much of it is interest versus how much of it is really paying for the loan.
Let's say that there is a home that I like, let's state that that is the house that I want to buy. It has a cost of, let's state that I need to pay $500,000 to purchase that house, this is the seller of your house right here.
I want to purchase it. I want to buy your home. 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 however I would truly like to live in that home 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 provide me the rest of the amount I require for that home, which is essentially $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 good person with a good job who has a good credit ranking.
We have to have that title of your house and as soon as you settle the loan we're going to give you the title of the 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 file that says who in fact owns your house, so this is the house title, this is the title of the house, home, home title. It will not go to me. It will go to the bank, the house title will go Have a peek here from the seller, maybe even the seller's bank, possibly they have not settled their 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 comes from old French, mort, means dead, dead, and the gage, implies pledge, I'm, I'm a hundred percent sure I'm mispronouncing it, but it originates from dead pledge.
Once I pay off the loan this pledge of the title to the bank will pass away, it'll return to me. And that's why it's called a dead pledge or a home mortgage. And most likely because it comes from old French is the reason why we do not say mort gage. We state, home mortgage.
They're truly describing the home loan, home mortgage, the home mortgage loan. And what I wish to do in the rest of this video is utilize a little screenshot from a spreadsheet I made to actually reveal you the math or really reveal 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 in fact, even much 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, home loan calculator, calculator dot XLSX.
But just 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 desire to have https://www.evernote.com/shard/s682/sh/6822eab7-5050-a17f-4cc7-d059bd5c763b/e180a68946dbe029dd84aed5139496f6 fun with it. However what it does here remains in this type of dark brown color, these are the assumptions that you could input which you can alter these cells in your spreadsheet without breaking the whole spreadsheet.
I'm purchasing a $500,000 house. It's a 25 percent deposit, so that's the $125,000 that I had actually saved up, that I 'd discussed right there. And after that 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 pretty plain vanilla loan.
So, thirty years, it's going to be a 30-year set rate home loan, fixed rate, repaired rate, which means the rates of interest will not alter. We'll discuss that in a bit. This 5.5 percent that I am paying on my, on the money that I borrowed will not alter throughout the 30 years.
Now, this little tax rate that I have here, this is to actually find out, what is the tax savings of the interest deduction on my loan? And we'll speak about that in a second, we can ignore it in the meantime. And after that these other things that aren't in brown, you should not tinker these if you really do open up this spreadsheet yourself.
So, it's actually the annual interest rate, 5.5 percent, divided by 12 and the majority of mortgage are compounded on a month-to-month basis. So, at the end of each month they see how much money you owe and after that they will charge you this much interest on that for the month.