And we're presuming that it deserves $500,000. We are presuming that it deserves $500,000. That is a possession. It's a property since it provides you future advantage, the future benefit of being able to reside in it. Now, there's a liability versus that possession, that's the home 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 sell the possessions and pay off the debt. If you offer the house you 'd get the title, you can get the cash and then you pay it back to the bank.
However 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 deposit was however this is your equity.
But you could not assume it's consistent and have fun with the spreadsheet a bit. But I, what I would, I'm introducing this because as we pay down the financial obligation this number is going to get smaller sized. So, this number is getting smaller, let's state at some point this is just $300,000, then my equity is going to get bigger.
Now, what I have actually done here is, well, actually prior to I get to the chart, let me in fact show you how I determine the chart and I do this over the course of 30 years and it passes month. So, so you can think of that there's in fact 360 rows here on the real spreadsheet and you'll see that if you go and open it up.
So, on month absolutely no, which I don't show here, you borrowed $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, rather of owing $375,000 at the end of the very first month I owe $376,718. Now, I'm a good guy, I'm not going to default on my mortgage so I make that very first mortgage payment that we calculated, that we calculated 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 actually gone up by precisely $410. Now, you're probably saying, hey, gee, I made a $2,000 payment, an approximately a $2,000 payment and https://www.openlearning.com/u/susana-qfw0g5/blog/HowToGetRidOfYourTimeshare/ my equity only increased by $410,000.
So, that very, in the start, your payment, your $2,000 payment is mostly interest. Just $410 of it is principal. 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 brand-new prepayment balance. I pay my home loan again. This is my brand-new loan balance. And notification, currently 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 distinction.
This is the interest and primary 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 notice, 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 for the principal, the real loan amount.
Many of it opted for the interest of the month. But as I start paying for the loan, as the loan balance gets smaller sized 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 settle the loan.
Now, the last thing I want to speak 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 monetary planners or realtors inform you, hey, the benefit of buying your house is that it, it's, it has tax advantages, 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 example, talk about the interest charges. So, this entire time over thirty years I am paying $2,100 a month or $2,129.29 a month. Now, at the beginning a lot of that is interest.
That $1,700 is tax-deductible. Now, as we go further and further each month I get a smaller and smaller sized tax-deductible portion of my real home loan payment. Out here the tax deduction is in fact really little. As I'm getting ready to pay off my entire home mortgage and get the title of my home.
This doesn't imply, let's say that, let's say in one year, let's state in one year I paid, I do not 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 state $10,000 went to interest. To say this deductible, and let's state 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 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 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 usually owed and just paid $25,000.