And we're presuming that it deserves $500,000. We are presuming that it deserves $500,000. That is a possession. It's an asset due to the fact that it gives you future benefit, the future advantage of being able to reside in it. Now, there's a liability versus that property, 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 offer the assets and settle the debt. If you offer your house you 'd get the title, you can get the cash and then you pay it back to the bank.
But if you were to relax 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 initial deposit was however this is your equity.
However you might not presume it's constant and play with the spreadsheet a little bit. But I, what I would, I'm introducing this due to the fact that as we pay down the financial obligation this number is going to get smaller sized. So, this number is getting smaller, let's state eventually 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 show you how I determine the chart and I do this throughout thirty years and it passes 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 zero, which I don't reveal here, you borrowed $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 mortgage payments yet.
So, now prior to 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 an excellent guy, I'm not going to default on my home loan so I make that 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 actually increased by exactly $410. Now, you're most likely saying, hi, gee, I made a $2,000 payment, an approximately a $2,000 payment and my equity just went up by $410,000.
So, that really, in the beginning, your payment, your $2,000 payment is primarily interest. Just $410 of it is primary. But as you, and then 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 once 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 over the course of 360 months you're visiting that it's a real, large difference.
This is the interest and principal portions 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 discover, this is the precise, this is exactly our mortgage payment, this $2,129. Now, on that really first month you saw that of my $2,100 just $400 of it, this is the $400, only $400 of it went to actually pay down the principal, the real loan amount.
The majority of it went for the interest of the month. But as I start paying down the loan, as the loan https://timesharecancellations.com/tools/ balance gets smaller and smaller, each of my payments, there's less interest to pay, let me do a much 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 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 great deal of times you'll hear financial organizers or realtors tell you, hey, the benefit of purchasing your house 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 really clear with what deductible ways. So, let's for instance, talk about the interest charges. 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 lot of that is interest.
That $1,700 is tax-deductible. Now, as we go further and even more each month I get a smaller sized and smaller sized tax-deductible portion of my real mortgage payment. Out here the tax reduction is actually really little. As I'm preparing to settle my entire home loan and get the title of my home.
This doesn't mean, let's say that, let's state in one year, let's say in one year I paid, I don't understand, 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, however let's say $10,000 went to interest. To say this deductible, and let's say 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 say I was paying approximately 35 percent on that $100,000.
Let's say, you understand, if I didn't have this mortgage I would pay 35 percent taxes which would be about $35,000 in taxes for that year. Simply, this is simply a rough estimate. Now, when you state 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 normally owed and just paid $25,000.