You're subtracting it from the income that you report to the IRS. If there's something that you could really take straight from your taxes, that's called a tax credit. So, if you were, uh, if there was some special thing that you could actually deduct 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 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 mortgage 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 first year I'm going to conserve about $7,000 in taxes, so that's nothing, absolutely nothing to sneeze at. Anyway, hopefully you discovered this valuable and I encourage you to go to that spreadsheet and, uh, play with the assumptions, just the presumptions in this brown color unless you really know what you're doing with the spreadsheet.
What I desire to make with this video is discuss what a mortgage is however I think the majority of us have a least a basic sense of it. But even much better than that actually go into the numbers and understand a little 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 how much of it is actually paying for the loan.
Let's state that there is a home that I like, let's state that that is your home that I wish to acquire. It has a price of, let's state that I require to pay $500,000 to buy that home, this is the seller of the house right here.
I would like to buy it. I wish to purchase your home. This is me right here. And I've had the ability to save up $125,000. I have actually had the ability to save up $125,000 but I would truly like to live 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 rest of the quantity I require 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 appear like, uh, uh, a great man with a good task who has an excellent credit score.
We need to have that title of your house and as soon as you pay off the loan we're going to provide you the title of your home. So what's going to take place 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 the home, the file Click here that says who really owns your home, so this is the house title, this is the title of your house, 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, maybe they have not paid off their home mortgage, it will go to the bank that I'm obtaining from.
So, this is the security right 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 mortgage is. And actually it comes from old French, mort, indicates dead, dead, and the gage, suggests pledge, I'm, I'm a hundred percent sure I'm mispronouncing it, however it originates from dead promise.
Once I settle the loan this promise of the title to the bank will pass away, it'll return to me. Which's why it's called a dead promise or a mortgage. And probably because it comes from old French is the reason that we don't say mort gage. We say, home mortgage.
They're really describing the home mortgage, home loan, the home mortgage loan. And what I want to carry out in the rest of this video is utilize a little screenshot from a spreadsheet I made to actually reveal you the mathematics or in fact show you what your mortgage payment is going to. And you can download, you can download this spreadsheet at Khan Academy, khanacademy.org/downloads, downloads, slash home loan calculator, mortgage, or in fact, even much better, just go to the download, simply go to the downloads, downloads, uh, folder on your web internet browser, you'll see a bunch of files and it'll be the file called Check out this site 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 wish to play with it. But what it does here remains in this sort of dark brown color, these are the assumptions that you could input which you can change 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 saved up, that I 'd spoken about right there. And then the, uh, loan quantity, well, I have the $125,000, I'm going to have to borrow $375,000. It determines it for us and then I'm going to get a pretty plain vanilla loan.
So, thirty years, it's going to be a 30-year fixed rate home mortgage, fixed rate, fixed rate, which means the rate of interest will not alter. We'll discuss that in a little bit. This 5.5 percent that I am paying on my, on the cash that I borrowed will not change over the course of the thirty years.
Now, this little tax rate that I have here, this is to actually determine, what is the tax cost savings of the interest reduction on my loan? And we'll discuss that in a 2nd, we can overlook it for now. And then these other things that aren't in brown, you shouldn't mess with these if you in fact do open up this spreadsheet yourself.
So, it's actually the annual rate of interest, 5.5 percent, divided by 12 and the majority of home mortgage loans are intensified on a regular monthly basis. So, at the end of each month they see how much money you owe and then they will charge you this much interest on that for the month.