And we're assuming that it's worth $500,000. We are http://timesharecancellations.com/testimonial/matthew-s/ assuming that it's worth $500,000. That is a possession. It's a possession because it gives you future advantage, the future benefit of having the ability to live in it. Now, there's a liability against that asset, that's the mortgage, 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 essentially 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 after that you pay it back to the bank.
However if you were to unwind this deal right away after doing it then you would have, you would have a $500,000 home, you 'd pay off your $375,000 in financial obligation and you would get in your pocket $125,000, which is precisely what your initial down payment was however this is your equity.
But you might not presume it's continuous and have fun with the spreadsheet a bit. However I, what I would, I'm introducing this since as we pay for the financial obligation this number is going to get smaller. So, this number is getting smaller, let's state at some point this is only $300,000, then my equity is going to get bigger.
Now, what I've done here is, well, really before I get to the chart, let me really show you how I calculate the chart and I do this over the course of 30 years and it goes by month. So, so you can think of that there's actually 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 don't reveal here, you obtained $375,000. Now, throughout 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, instead of owing $375,000 at the end of the very first month I owe $376,718. Now, I'm a great person, I'm not going to default on my home mortgage so I make that very first home loan payment that we computed, 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 actually gone up by exactly $410. Now, you're probably stating, 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 extremely, in the start, your payment, your $2,000 payment is mainly interest. Only $410 of it is principal. However as you, and after that you, and after that, 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 notification, already 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 visiting that it's a real, large distinction.
This is the interest and principal parts of our mortgage payment. So, this entire height right here, this is, let me scroll down a bit, this is by month. So, this entire height, if you observe, this is the exact, this is exactly our home 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 for the principal, the real loan amount.
Many of it went for the interest of the month. However as I begin paying down 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, over there, that last month there was less interest so more of my $2,100 actually goes to pay off the loan.
Now, the last thing I desire to talk about in this video without making it too long is this idea 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 house 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 methods. So, let's for example, talk about the interest fees. 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 great deal of that is interest.
That $1,700 is tax-deductible. Now, as we go even more and further every 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 small. As I'm preparing to pay off my whole home loan and get the title of my house.
This doesn't suggest, 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 state in year one, year one, I pay, I pay $10,000 in interest, $10,000 in interest.
And, but let's say $10,000 went to interest. To say this deductible, and let's state 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 state I was paying approximately 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 be about $35,000 in taxes for that year. Just, this is just a rough price quote. Now, when you say that $10,000 is tax-deductible, the interest is tax-deductible, that does not imply that I can simply take it from the $35,000 that I would have generally owed and just paid $25,000.