And we're presuming that it deserves $500,000. We are assuming that it's worth $500,000. That is an asset. It's an asset due to the fact that it provides you future benefit, the future benefit of having the ability to reside in it. Now, there's a liability versus that asset, that's the mortgage loan, that's Visit this site the $375,000 liability, $375,000 loan or financial obligation.
If this was all of your possessions and this is all of your debt and if you were basically to sell the possessions and settle the financial obligation. If you sell your home you 'd get the title, you can get the cash and then you pay it back to the bank.
However if you were to unwind this deal instantly 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 assume it's continuous and play with the spreadsheet a bit. But I, what I would, I'm presenting this since as we pay down the debt this number is going to get smaller sized. So, this number is getting smaller sized, 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 actually show you how I compute the chart and I do this throughout 30 years and it goes by month. So, so you can picture 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 no, which I don't show here, you borrowed $375,000. Now, over the course of 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 $375,000 is $1,718.75. So, I haven't made any home 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 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 started 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 actually gone up by precisely $410. Now, you're most likely saying, hello, gee, I made a $2,000 payment, a roughly a $2,000 payment and my equity only went up by $410,000.
So, that really, in the start, your payment, your $2,000 payment is mostly interest. Only $410 of it is primary. But as you, and after that you, and then, 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 new prepayment balance. I pay my mortgage 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 throughout 360 months you're going to see that it's an actual, sizable distinction.
This is the interest and primary portions of our home loan payment. So, this whole height right here, this is, let me scroll down a little bit, this is by month. So, this entire height, if you observe, 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 for the principal, the real loan amount.
Most of it opted for the interest of the month. But as I begin paying for https://www.4shared.com/office/lV75qNhyea/238363.html the loan, as the loan balance gets smaller sized and smaller, each of my payments, there's less interest to pay, let me do a better color than that. There is less interest, let's say if we go out here, this is month 198, over there, that last month there was less interest so more of my $2,100 really goes to pay off 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 monetary coordinators or realtors tell you, hey, the benefit of purchasing your home is that it, it's, it has tax benefits, and it does.
Your interest, not your entire payment. Your interest is tax deductible, deductible. And I wish to be really clear with what deductible ways. So, let's for example, talk about the interest charges. So, this whole time over thirty years I am paying $2,100 a month or $2,129.29 a month. Now, at the beginning a great deal of that is interest.
That $1,700 is tax-deductible. Now, as we go even more and further each month I get a smaller and smaller sized tax-deductible portion of my real mortgage payment. Out here the tax reduction is in fact very small. As I'm preparing to settle my whole home loan and get the title of my house.
This doesn't mean, let's state that, let's say in one year, let's say in one year I paid, I don't know, I'm going to make up a number, I didn't compute it on the spreadsheet. Let's say 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 say this deductible, and let's say before this, let's say 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 approximately 35 percent on that $100,000.
Let's say, you know, if I didn't have this mortgage I would pay 35 percent taxes which would have to do with $35,000 in taxes for that year. Simply, this is simply a rough price quote. Now, when you say that $10,000 is tax-deductible, the interest is tax-deductible, that does not suggest that I can just take it from the $35,000 that I would have normally owed and only paid $25,000.