And we're presuming that it's worth $500,000. We are assuming that it deserves $500,000. That is an asset. It's a property due to the fact that it provides you future benefit, the future benefit of being able to live in it. Now, there's a liability against that property, that's the home loan, that's the $375,000 liability, $375,000 loan or financial obligation.
If this was all of your assets and this is all of your debt and if you were essentially to sell the assets and settle the debt. If you sell 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 home, you 'd settle your $375,000 in financial obligation and you would get in your pocket $125,000, which is exactly what your original down payment was however this is your equity.
However you could not presume it's constant and have fun with the spreadsheet a bit. However I, what I would, I'm introducing this due to the fact that as we pay down the financial obligation this number is going to get smaller sized. So, this number is getting smaller, let's state at some time this is just $300,000, then my equity is going to get bigger.
Now, what I have actually done here is, well, actually before I get to the chart, let me in fact show you how I compute the chart and I do this throughout thirty years and it goes by month. So, so you can envision that there's in fact 360 rows here on the actual spreadsheet and you'll see that if you go and open it up.
So, on month no, which I don't reveal here, you obtained $375,000. Now, over the course of that month they're going to charge you 0.46 percent interest, keep in mind that was 5.5 percent divided by 12. 0.46 percent interest on $375,000 is $1,718.75. So, I haven't made any mortgage payments yet.
So, now before I pay any of my payments, instead of owing $375,000 at the end of the very first month I owe $376,718. Now, I'm a great man, I'm not going to default on my mortgage so I make that very first mortgage payment that we determined, that we calculated 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 gone up by precisely $410. Now, you're most likely saying, hey, gee, I made a $2,000 payment, a roughly a $2,000 payment and my equity only increased by $410,000.
So, that really, in the start, your payment, your $2,000 payment is mostly interest. Just $410 of it is primary. However as you, and after that you, and after that, so as your loan balance decreases you're going to pay less interest here and so 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 once again. This is my new loan balance. And notice, currently 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 going to see that it's an actual, large distinction.
This is the interest and primary parts of our home loan payment. So, this whole height right here, this is, let me scroll down a bit, this is by month. So, this whole height, if you observe, this is the exact, this is exactly our home mortgage payment, this $2,129. Now, on that extremely first month you saw that of my $2,100 just $400 of it, this is the $400, just $400 of it went to actually pay down the principal, the actual loan quantity.
The majority of it opted for the interest of the month. But as I begin paying down the loan, as the loan balance gets smaller sized and smaller sized, each of my payments, there's less interest to pay, let me do a better color than that. There is less interest, let's state if we go out here, this is month 198, there, that last month there was less interest so more of my $2,100 in fact goes to pay off the loan.
Now, the last thing I desire to speak about in this video without making it too long is this concept of a interest tax reduction. So, a lot of times you'll hear monetary planners or real estate agents tell you, hey, the benefit of purchasing 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 want to be very clear with what deductible methods. So, let's for example, discuss the interest costs. So, this entire time over thirty years I am paying $2,100 a month or $2,129.29 a month. Now, at the starting a lot of that is interest.
That $1,700 is tax-deductible. Now, as we https://timesharecancellations.com/time-share-cancellation-resources/ go further and further each month I get a smaller sized and smaller tax-deductible portion of my real home mortgage payment. Out here the tax reduction is actually extremely small. As I'm getting ready to pay off my whole home loan and get the title of my house.
This does not indicate, let's say that, let's say in one year, let's say in one year I paid, I don't know, I'm going to comprise 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, however let's say $10,000 went to interest. To state this deductible, and let's state before this, let's say prior to this I was making $100,000. Let's put the loan aside, let's state I was making $100,000 a year and let's state I was paying approximately 35 percent on that $100,000.
Let's state, you know, if I didn't have this home mortgage I would pay 35 percent taxes which would have to do with $35,000 in taxes for that year. Simply, this is just a rough price quote. Now, when you state that $10,000 is tax-deductible, the interest is tax-deductible, that does not indicate that I can just take it from the $35,000 that I would have usually owed and just paid $25,000.