And we're presuming that it deserves $500,000. We are assuming that it's worth $500,000. That is a possession. It's a property since it provides you future advantage, the future advantage of having the ability to live in it. Now, there's a liability against that possession, that's the mortgage, that's the $375,000 liability, $375,000 loan or debt.
If this was all of your assets and this is all of your debt and if you were essentially to offer the possessions and pay off the debt. If you offer your home you 'd get the title, you can get the cash and after that you pay it back to the bank.
However if you were to unwind this transaction immediately after doing it then you would have, you would have a $500,000 house, you 'd settle your $375,000 in financial obligation and you would get in your pocket $125,000, which is precisely what your initial down payment was but this is your equity.
But you might not presume it's consistent and play with the spreadsheet a little bit. However I, what I would, I'm presenting this due to the fact that as we pay for the financial obligation this number is going to get smaller. So, this number is getting smaller, let's say eventually this is only $300,000, then my equity is going to get bigger.
Now, what I've done here is, well, really prior to I get to the chart, let me really reveal you how I compute the chart and I do this throughout 30 years and it passes month. So, so you can imagine that there's really 360 rows here on the real spreadsheet and you'll see that if you go and open it up.
So, on month zero, which I don't show here, you obtained $375,000. Now, throughout that month they're going to charge you 0.46 percent interest, bear in mind that was 5.5 percent divided by 12. 0.46 percent interest on https://www.4shared.com/office/4nFR_j0dea/352320.html $375,000 is $1,718.75. So, I have not made any mortgage payments yet.
So, now prior to I pay any of my payments, instead of owing $375,000 at the end of the first month I owe $376,718. Now, I'm a hero, I'm not going to default on my home loan so I make that first mortgage payment that we computed, that we computed right over here.
Now, this right here, what I, little asterisk here, this is my equity now. So, remember, I began with $125,000 of equity. After paying one loan balance, after, after my first payment I now have $125,410 in equity. So, my equity has increased by precisely $410. Now, you're most likely stating, hi, gee, I made a $2,000 payment, an approximately a $2,000 payment and my equity only increased by $410,000.
So, that extremely, in the beginning, your payment, your $2,000 payment is mainly interest. Only $410 of it is principal. But as you, and then you, and after that, so as your loan balance goes down you're going to pay less interest here therefore each of your payments are going to be more weighted towards principal and less weighted towards interest.
This is your brand-new prepayment balance. I pay my home loan again. This is my new loan balance. And notification, already by month two, $2.00 more went to principal and $2.00 less went to interest. And over the course of 360 months you're visiting that it's an actual, large distinction.
This is the interest and principal parts of our mortgage payment. So, this entire height right here, this is, let me scroll down a little bit, this is by month. So, this whole height, if you discover, this is the specific, this is precisely our home loan payment, this $2,129. Now, on that very first month you saw that of my $2,100 just $400 of it, this is the $400, only $400 of it went to really pay down the principal, the actual loan quantity.
The majority of it went for the interest of the month. However as I begin paying for the loan, as the loan balance gets smaller and smaller sized, each of my payments, there's less interest to pay, let me do a much better color than that. There is less interest, let's say if we head out here, this is month 198, over there, that last month there was less interest so more of my $2,100 really goes to settle the loan.
Now, the last thing I wish to discuss in this video without making it too long is this idea of a interest tax deduction. So, a lot of times you'll hear financial planners or realtors tell you, hey, the advantage of buying your house is that it, it's, it has tax advantages, and it does.
Your interest, not your whole payment. Your interest is tax deductible, deductible. And I wish to be extremely clear with what deductible means. So, let's for example, discuss the interest charges. So, this whole time over 30 years I am paying $2,100 a month or $2,129.29 a month. Now, at the beginning a lot of that is interest.
That $1,700 is tax-deductible. Now, as we go even more and further monthly I get a smaller sized and smaller tax-deductible portion of more info my real home loan payment. Out here the tax reduction is in fact extremely small. As I'm preparing yourself to pay off my whole mortgage and get the title of my home.
This does not indicate, let's state that, let's say in one year, let's say in one year I paid, I do not understand, I'm going to make up a number, I didn't determine it on the spreadsheet. Let's state in year one, year one, I pay, I pay $10,000 in interest, $10,000 in interest.
And, but let's state $10,000 went to interest. To say this deductible, and let's state before this, let's state before this I was making $100,000. Let's put the loan aside, let's say I was making $100,000 a year and let's state I was paying roughly 35 percent on that $100,000.
Let's say, you know, if I didn't have this home loan I would pay 35 percent taxes which would have to do with $35,000 in taxes for that year. Just, this is simply a rough estimate. Now, when you state that $10,000 is tax-deductible, the interest is tax-deductible, that does not mean that I can just take it from the $35,000 that I would have typically owed and just paid $25,000.