And we're assuming that it's worth $500,000. We are assuming that it deserves $500,000. That is an asset. It's a possession due to the fact that it offers you future advantage, the future benefit of having the ability to live in it. Now, there's a liability against that property, that's the mortgage loan, that's the $375,000 liability, $375,000 loan or debt.
If this was all of your properties and this is all of your debt and if you were basically to sell the possessions and pay off the financial obligation. If you offer your house 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 transaction 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 original down payment was however this is your equity.
But you could not assume it's continuous and have fun with the spreadsheet a bit. However I, what I would, I'm presenting this because as we pay down 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 just $300,000, then my equity is going to get bigger.
Now, what I've done here is, well, in fact prior to I get to the chart, let me in fact show you how I compute the chart and I do this throughout 30 years and it goes by month. So, so you can picture that there's actually 360 rows here on the real spreadsheet and you'll see that if you go and open it up.
So, on month zero, 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 mortgage 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 first 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 began 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 actually increased 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 increased by $410,000.
So, that extremely, in the start, your payment, your $2,000 payment is mostly interest. Just $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 brand-new prepayment balance. I pay my home loan again. This is my new loan balance. And notification, currently by month two, $2.00 more went to primary and $2.00 less went to interest. And over the course of 360 months you're going to see that it's a real, sizable difference.
This is the interest and principal parts of our home 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 observe, this is the specific, this is precisely 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, just $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. However as I start 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 a better color than that. There is less interest, let's say if we go 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 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 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 want to be very clear with what deductible methods. So, let's for circumstances, discuss the interest costs. 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, Visit this page as we go even more and even more each month I get a smaller and smaller sized tax-deductible part of my actual mortgage payment. Out here the tax reduction is actually really small. As I'm preparing https://docdro.id/T0fuXn3 yourself to pay off my whole mortgage and get the title of my home.
This doesn't indicate, 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 determine 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 state this deductible, and let's say prior to this, let's say prior to this I was making $100,000. Let's put the loan aside, let's say I was making $100,000 a year and let's state I was paying approximately 35 percent on that $100,000.
Let's say, you know, 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 price quote. Now, when you state 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 usually owed and just paid $25,000.