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You can see this inthe actual spreadsheet. At month 360 my final payment is all going to pay off the principal. Very little, if anything,of that is interest. Now, the last thing I wantto talk about in this video, without making it too long, is this idea of a interest tax deduction. A lot of times you'll hearfinancial planners or realtors tell you the benefit of buying your house is it has tax advantages, and it does.
Your interest is tax deductible. Your interest, not your whole payment. Your interest is tax deductible. I want to be very clearwhat deductible means. First let's talk aboutwhat the interest means. This whole time over 30 yearsI am paying $2,100 a month, or $2129.21 a month.
Now the beginning, alot of that is interest. So on month one, 1,700of that was interest. That $1,700 is tax deductible. As we go further and further, each month I get smaller andsmaller tax deductible portion of my actual mortgage payment. Out here the tax deductionis actually very small, as I'm getting ready topay off my entire mortgage and get the title of my house.
I want to be very clear on this notion of what tax deductible even means, because I think it ismisunderstood very often. Let's say in one yearI paid, I don't know, I'm gonna make up a number, I didn't calculate it on the spreadsheet. Let's say in year one Ipay $10,000 in interest. 10,000 in interest. Remember, my actual paymentswill be higher than that because some of my payments went to actually paying down the loan. But let's say 10,000 went to interest. And let's say before this, let's say before thisI was making 100,000, let's put the loan aside.
Let's say I was making $100,000 a year, and let's say I was payingroughly 35% on that 100,000. I won't go into the whole tax structure and the differentbrackets and all of that. Let's say if I didn't have this mortgage I would pay 35% taxes, which would be about $35,000in taxes for that year. This is just a rough estimate.
When you say that $10,000is tax deductible, the interest is tax deductible, that does not mean that I canjust take it from the $35,000 that I would have normallyowed and only pay 25,000. What it means is I can deductthis amount from my income. When I tell the IRS howmuch did I make this year, instead of saying I made $100,000,I say that I made $90,000 because I was able to deduct this, not directly from my taxes, I was able to deduct it from my income.
So now if I only made $90,000 -- and this is, I'm doing agross oversimplification of how taxes actually get calculated -- and I pay 35% of that, let'sget the calculator out. Let's get the calculator. So 90 times .35 is equal to 31,500. So this will be equal to $31,500. $31,500. Off of a 10,000 deduction,$10,000 of deductible interest,
I essentially saved $3,500.I did not save $10,000. Another way to think about it, if I paid 10,000 interestand my tax rate is 35%, I'm gonna save 35% ofthis in actual taxes. This is what people meanwhen they say deductible. You're deducting it from the income that you report to the IRS. If there's something thatyou could take straight from your taxes, that'scalled a tax credit.
If there was some specialthing that you could actually deduct it straight from yourtaxes, that's a tax credit. But a deduction justtakes it from your income. On this spreadsheet Ijust want to show you that I actually calculated, in that month, how much of a tax deduction do you get. So for example, just offof the first month you paid $1,700 in interest of your$2,100 mortgage payment, so 35% of that, and I got 35%as one of your assumptions, 35% of $1,700, I will save$600 in taxes on that month.
So roughly over thecourse of the first year I'm gonna save about $7,000 in taxes, so that's nothing to sneeze at. Anyway, hopefully you found this helpful and I encourage you togo to that spreadsheet, and play with the assumptions, only the assumptions in this brown color unless you really know whatyou're doing with a spreadsheet, and you can see how thisactually changes based on different interest rates,different loan amounts, different down payments, different terms. Different tax rates, that will actually change the tax savings, and you can play aroundwith the different types of fixed mortgages on this spreadsheet.
