And we're assuming that it's worth $500,000. We are assuming that it deserves $500,000. That is a property. It's a possession due to the fact that it offers you future benefit, the future advantage of having the ability to live in it. Now, there's a liability against that possession, that's the home 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 financial obligation and if you were essentially to sell the properties and settle the debt. If you sell the home you 'd get the title, you can get the cash and after that you pay it back to the bank.
But if you were to relax this transaction instantly after doing https://app.box.com/s/uxx92u8z505bu3rjktajjtfe0ww7uw7f it then you would have, you would have a $500,000 house, you 'd pay off your $375,000 in financial obligation and you would get in your pocket Helpful site $125,000, which is exactly what your original down payment was however this is your equity.
But you could not presume it's continuous and play with the spreadsheet a 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 eventually this is just $300,000, then my equity is going to get bigger.
Now, what I've done here is, well, actually before I get to the chart, let me in fact show you how I determine the chart and I do this throughout thirty years and it goes by month. So, so you can imagine 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 show 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 have not made any home mortgage payments yet.
So, now prior to 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 person, I'm not going to default on my home loan so I make that 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, keep in mind, 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 increased by precisely $410. Now, you're most likely saying, hey, gee, I made a $2,000 payment, an approximately 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 mainly interest. Just $410 of it is principal. However 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 home loan again. This is my brand-new loan balance. And notification, already by month two, $2.00 more went to primary and $2.00 less went to interest. And throughout 360 months you're visiting that it's an actual, large distinction.
This is the interest and principal portions 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 specific, this is exactly our home loan payment, this $2,129. Now, on that really first month you saw that of my $2,100 only $400 of it, this is the $400, just $400 of it went to actually pay down the principal, the actual loan amount.
Most of it chose the interest of the month. But as I begin 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 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 in fact goes to settle the loan.
Now, the last thing I wish to speak about in this video without making it too long is this idea of a interest tax deduction. So, a lot of times you'll hear financial organizers or real estate agents tell you, hey, the advantage of purchasing your home 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 really clear with what deductible methods. So, let's for instance, speak about the interest costs. 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 lot of that is interest.
That $1,700 is tax-deductible. Now, as we go even more and even more monthly I get a smaller sized and smaller tax-deductible portion of my real mortgage payment. Out here the tax deduction is really very small. As I'm getting all set to pay off my whole home loan and get the title of my house.
This does not suggest, let's say that, let's state in one year, let's state in one year I paid, I don't understand, I'm going to comprise a number, I didn't determine 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 state before 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 roughly 35 percent on that $100,000.
Let's state, you know, 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. 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 suggest that I can just take it from the $35,000 that I would have normally owed and only paid $25,000.