And we're presuming that it deserves $500,000. We are presuming that it deserves $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 reside 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 debt.
If this was all of your assets and this is all of your debt https://www.sendspace.com/file/wgouz1 and if you were basically to offer the assets and pay off the financial obligation. If you offer the home 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 instantly after doing it then you would have, you would have a $500,000 home, you 'd settle 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 presume it's constant and have fun with the spreadsheet a bit. But I, what I would, I'm presenting this due to the fact that as we pay down the financial obligation this number is going to get smaller. So, this number is getting smaller, let's state eventually this is only $300,000, Great post to read then my equity is going to get bigger.
Now, what I've done here is, well, really before I get to the chart, let me really reveal you how I compute the chart and I do this over the course of 30 years and it passes month. So, so you can picture 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 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, bear 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 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 home 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, 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 gone up by exactly $410. Now, you're most likely stating, hello, gee, I made a $2,000 payment, an approximately a $2,000 payment and my equity only went up by $410,000.
So, that extremely, in the start, your payment, your $2,000 payment is primarily interest. Just $410 of it is principal. But as you, and then you, and then, 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 notice, currently by month 2, $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 distinction.
This is the interest and principal portions of our home mortgage payment. So, this whole 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 exact, this is precisely our mortgage payment, this $2,129. Now, on that very 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 for the principal, the actual loan quantity.
The majority of it opted for the interest of the month. But as I begin 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 much 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 really goes to settle the loan.
Now, the last thing I want to speak about in this video without making it too long is this concept of a interest tax deduction. So, a lot of times you'll hear financial planners or real estate agents inform you, hey, the advantage 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 desire to be very clear with what deductible means. So, let's for example, talk about the interest costs. So, this whole time over 30 years I am paying $2,100 a month or $2,129.29 a month. Now, at the beginning a great deal of that is interest.
That $1,700 is tax-deductible. Now, as we go even more and further monthly I get a smaller and smaller sized tax-deductible portion of my actual mortgage payment. Out here the tax reduction is really very small. As I'm getting all set to settle my entire mortgage and get the title of my house.
This does not imply, let's say that, let's state 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 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 prior to 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 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 just a rough estimate. Now, when you say that $10,000 is tax-deductible, the interest is tax-deductible, that does not mean that I can simply take it from the $35,000 that I would have generally owed and just paid $25,000.