And we're presuming that it deserves $500,000. We are assuming that it's worth $500,000. That is a possession. It's a possession due to the fact that it provides you future benefit, the future benefit of being able to live in it. Now, there's a liability versus that property, that's the home 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 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.
However if you were to unwind this deal 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 but this is your equity.
However you might not assume it's consistent and have fun with the spreadsheet a little bit. However I, what I would, I'm presenting this due to the fact that as we pay for the debt 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 larger.
Now, what I have actually done here is, well, in fact prior to I get to the chart, let me actually reveal you how I determine the chart and I do this throughout thirty years and it passes month. So, so you can imagine 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 no, which I don't reveal 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 haven't made any home loan 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 an excellent guy, I'm not going to default on my home loan so I make that very first mortgage payment that we calculated, that we determined right over here.
Now, this right here, what I, little asterisk here, this is my equity now. So, keep in mind, 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 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 only went up by $410,000.
So, that really, in the start, your payment, your $2,000 payment is mostly interest. Only $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 new prepayment balance. I pay my mortgage once again. This is my new loan balance. And notice, 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 an actual, sizable difference.
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 precise, this is precisely our home mortgage payment, this $2,129. Now, on that very first month you saw that of my $2,100 only $400 of it, this is the $400, only $400 of it went to in fact pay for the principal, the actual loan amount.
Many of it chose the interest of the month. But as I begin paying down the loan, as the loan balance gets smaller sized and smaller sized, 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 go out here, this is month 198, there, that last month there was less interest so more of my $2,100 really goes to pay off the loan.
Now, the last thing I wish to talk about 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 monetary coordinators or real estate agents inform you, hey, the benefit of purchasing your house is that it, it's, it has tax advantages, and it does.
Your interest, not your entire payment. Your interest is tax deductible, deductible. And I wish to be extremely clear with what deductible methods. So, let's for example, speak about the interest charges. So, this whole 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 even more and even more monthly I get a smaller and smaller sized tax-deductible portion of my actual mortgage payment. Out here the tax reduction is actually very small. As I'm preparing to pay off my whole home mortgage and get the title of my house.
This doesn't mean, let's state that, let's state in one year, let's state in one year I paid, I do not understand, I'm going to comprise 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 say this deductible, and let's say before this, let's state 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 roughly 35 percent on that $100,000.
Let's say, you know, if I didn't have this home mortgage I would pay 35 percent taxes which would be about click here $35,000 in taxes for that year. Just, this is simply a rough estimate. Now, when you say that $10,000 is tax-deductible, the interest is tax-deductible, that does not indicate that I can just take it from the $35,000 that I would have normally owed and only paid $25,000.