And we're assuming that it deserves $500,000. We are presuming that it's worth $500,000. That is a possession. It's an asset since it provides you future advantage, the future advantage of having the ability to reside in it. Now, there's a liability against that asset, that's the mortgage loan, that's 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 properties and pay off the financial obligation. If you sell the 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 relax this deal instantly after doing it then you would have, you would have a $500,000 house, you 'd settle your $375,000 in debt and you would get in your pocket $125,000, which is precisely what your original deposit was but this is your equity.
But you might not presume it's continuous and have fun with the spreadsheet a bit. But I, what I would, I'm introducing this since as we pay down the financial obligation this number is going to get smaller sized. So, this number is getting smaller sized, let's say at some time this is only $300,000, then my equity is going to get bigger.
Now, what I have actually done here is, well, in fact before I get to the chart, let me really reveal you how I compute the chart and I do this over the course of thirty years and it goes by month. So, so you can envision that there's really 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 show 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 have not made any home loan payments yet.
So, now before I pay any of my payments, rather of owing $375,000 at the end of the very first month I owe $376,718. Now, I'm a hero, I'm not going to default on my home mortgage so I make that first home mortgage payment that we determined, that we computed 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 very first payment I now have $125,410 in equity. So, my equity has gone up by precisely $410. Now, you're most likely stating, hey, gee, I made a $2,000 payment, a roughly a $2,000 payment and my equity just went up by $410,000.
So, that extremely, in the start, your payment, your $2,000 payment is primarily interest. Just $410 of it is principal. However as you, and after that you, and then, so as your loan balance decreases 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 primary and $2.00 less went to interest. And throughout 360 months you're going to see that it's an actual, substantial difference.
This is the interest and principal portions 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 precise, this is exactly our home loan payment, this $2,129. Now, on that extremely first month you saw that of my $2,100 only $400 of it, this is the $400, only $400 of it went to really pay for the principal, the actual loan quantity.
The majority of it went for the interest of the month. However as I begin paying down 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 state if we head 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 wish to discuss in this video without making it too long is this concept of a interest tax reduction. So, a lot of times you'll hear financial planners or real estate agents tell you, hey, the benefit of buying 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 extremely clear with what deductible means. So, let's for circumstances, discuss the interest costs. So, this entire time over 30 years I am paying $2,100 a Go to this site 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 further and further each month I get a smaller sized and smaller sized tax-deductible portion of my actual home mortgage payment. Out here the tax reduction is in fact really little. As I'm getting ready to pay off my entire home mortgage and get the title of my house.
This doesn't imply, let's say that, let's say in one year, let's state in one year I paid, I do not know, I'm going to comprise 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, but let's state $10,000 went to interest. To state this http://www.mediafire.com/file/451ijc98v6sv6jq/366156.pdf/file deductible, and let's say prior to this, let's state 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 say I was paying roughly 35 percent on that $100,000.
Let's say, you know, if I didn't have this home mortgage I would pay 35 percent taxes which would be about $35,000 in taxes for that year. Just, this is just a rough quote. Now, when you say that $10,000 is tax-deductible, the interest is tax-deductible, that does not suggest that I can simply take it from the $35,000 that I would have generally owed and only paid $25,000.