And we're assuming that it's worth $500,000. We are assuming that it's worth $500,000. That is an asset. It's an asset since it provides you future benefit, the future benefit of being able to live in it. Now, there's a liability versus that possession, that's the mortgage loan, that's the $375,000 liability, $375,000 loan or debt.
If this was all of your possessions and this is all of your financial obligation and if you were basically 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 then you pay it back to the bank.
But if you were to unwind this transaction immediately after doing it then you would have, you would have a $500,000 house, you 'd pay off your $375,000 in debt 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 continuous and play with the spreadsheet a little bit. However I, what I would, I'm presenting this because as we pay for the financial obligation this number is going to get smaller sized. So, this number is getting smaller sized, let's state at some time this is only $300,000, then my equity is going to get bigger.
Now, what I've done here is, well, actually prior to I get to the chart, let me really reveal you how I determine the chart and I do this over the course of 30 years and it goes by month. So, so you can envision that there's actually 360 rows Visit website here on the actual spreadsheet and you'll see that if you go and open it up.
So, on month zero, which I do not show here, you borrowed $375,000. Now, over the course of that month they're going to charge you 0.46 percent interest, remember 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 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 good man, I'm not going to default on my home loan so I make that first home loan payment that we determined, that we determined 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 increased by exactly $410. Now, you're most likely stating, hello, gee, I made a $2,000 payment, a roughly 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 mostly interest. Only $410 of it is principal. But 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 new prepayment balance. I pay my mortgage again. This is my brand-new loan balance. And notice, already by month two, $2.00 more went to principal and $2.00 less went to interest. And throughout 360 months you're visiting that it's an actual, substantial 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 whole height, if you notice, 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 only $400 of it, this is the $400, just $400 of it went to really pay down the principal, the real loan quantity.
Many of it opted for the interest of the month. But as I begin paying for the loan, as the loan balance gets smaller and smaller, each of my payments, there's less interest to pay, let me do https://www.4shared.com/office/lV75qNhyea/238363.html a much better color than that. There is less interest, let's state if we head out here, this is month 198, over 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 talk 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 organizers or real estate agents inform 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 very clear with what deductible means. So, let's for example, talk about the interest fees. So, this whole time over 30 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 go even more and further every month I get a smaller and smaller sized tax-deductible part of my real mortgage payment. Out here the tax reduction is really extremely small. As I'm getting prepared to pay off my entire home mortgage and get the title of my home.
This does not mean, let's say 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 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 state prior to this, let's say before 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 roughly 35 percent on that $100,000.
Let's state, you understand, 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 quote. Now, when you state that $10,000 is tax-deductible, the interest is tax-deductible, that does not indicate that I can simply take it from the $35,000 that I would have generally owed and just paid $25,000.