And we're presuming that it's worth $500,000. We are presuming that it's worth $500,000. That is a possession. It's a possession because it provides you future benefit, the future benefit of having the ability to live in it. Now, there's a liability against that possession, that's the home mortgage 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 basically to offer the assets and pay off the financial obligation. 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.
But if you were to unwind this transaction right away 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 exactly what your initial down payment was however this is your equity.
However you might not presume it's continuous and have fun 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. So, this number is getting smaller, let's state eventually this is only $300,000, then my equity is going to get larger.
Now, what I have actually done here is, well, in fact before I get to the chart, let me in fact reveal you how I determine the chart and I do this over the course of thirty years and it goes by month. So, so you can picture 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 absolutely no, which I do not 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 haven't made any home loan 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 mortgage so I make that very first home mortgage payment that we calculated, 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 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 primarily interest. Only $410 of it is primary. But as you, and after that you, and then, 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 mortgage once again. This is my brand-new loan balance. And notice, already by month 2, $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, large difference.
This is the interest and principal parts of our mortgage payment. So, this whole height right here, this is, let me scroll down a bit, this is by month. So, this entire height, if you see, this is the specific, this is exactly our mortgage 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, just $400 of it went to really pay down the principal, the actual loan quantity.
The majority of it opted for the interest of the month. But as I start 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 better color than that. There is less interest, let's say if we head out here, this is month 198, 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 want to discuss in this video without making it too long is this concept of a interest tax reduction. So, a great deal of times you'll hear monetary planners or realtors 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 whole payment. Your interest is tax deductible, deductible. And I wish to be very clear with what deductible methods. So, let's for circumstances, talk about the interest fees. So, this entire time over 30 years I am paying $2,100 a month or $2,129.29 a month. Now, at the starting a great deal of that is interest.
That $1,700 is tax-deductible. Now, as we go further and further every month I get a smaller and smaller tax-deductible part of my actual home mortgage payment. Out here the tax reduction is really really small. As I'm preparing yourself to pay off my whole mortgage and get the title of my house.
This does not suggest, let's state that, let's say in one year, let's say 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, however let's state $10,000 went to interest. To state https://emilianowznc899.webs.com/apps/blog/show/49029880-what-is-a-timeshare-resort this deductible, and let's say before 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 state, you understand, 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 simply a rough price quote. Now, when you state that $10,000 is tax-deductible, the interest is tax-deductible, that does not mean that I can simply take it from the $35,000 that I would have normally owed and just paid $25,000.