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 since it gives you future benefit, the future benefit of having the ability 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 and if you were basically to sell the properties and pay off the financial obligation. If you offer your 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 unwind this transaction immediately after doing it then you would have, you would have a $500,000 house, you 'd pay off your $375,000 in debt and you would get in your pocket $125,000, which is exactly what your original deposit was but this is your equity.
However you could not presume it's continuous and play with the spreadsheet a bit. However 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 sized, let's state at some point this is just $300,000, then my equity is going to get bigger.
Now, what I've done here is, well, really prior to I get to the chart, let me really show you how I determine the chart and I do this throughout thirty years and it passes month. So, so you can think of 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 absolutely no, which I do not reveal 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 haven't made any home loan payments yet.
So, now before I pay any of my payments, instead 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 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, 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 gone up by precisely $410. Now, you're probably stating, hey, gee, I made a $2,000 payment, an approximately a $2,000 payment and my equity just went up by $410,000.
So, that extremely, in the start, your payment, your $2,000 payment is primarily interest. Only $410 of it is primary. But as you, and then you, and then, so as your loan balance decreases you're going to pay less interest here and so 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 mortgage once 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 throughout 360 months you're going to see that it's a real, substantial difference.
This is the interest and primary parts of our mortgage payment. So, this whole height right here, this is, let me scroll down a bit, this is by month. So, this entire height, if you see, this is the exact, this is precisely 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, only $400 of it went to in fact pay for the principal, the real loan amount.
The majority of it opted for the interest of the month. But as I start paying down 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 go out here, this is month 198, over 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 wish to speak about in this video without making it too long is this idea of a interest tax reduction. So, a lot of times you'll hear financial coordinators or real estate agents inform you, hey, the benefit of buying your house is that it, it's, it has tax benefits, and it does.
Your interest, not your entire payment. Your interest is tax deductible, deductible. And I wish to be really clear with what deductible means. So, let's for instance, speak about the interest fees. 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. http://jaredzpcw326.simplesite.com/447009084 Now, as we go even more and even more every month I get a smaller sized and smaller sized tax-deductible portion of my real home loan payment. Out here the tax reduction is really extremely small. As I'm getting prepared to pay off my whole home mortgage and get the title of my home.
This doesn't indicate, let's state that, let's say in one year, let's state in one year I paid, I do not know, I'm going to comprise 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, however let's say $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 state I was making $100,000 a year and let's state I was paying approximately 35 percent on that $100,000.
Let's state, you understand, if I didn't have this home loan I would pay 35 percent taxes which would be about $35,000 in taxes for that year. Just, this is simply a rough estimate. Now, when you state 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 usually owed and just paid $25,000.
