And we're assuming that it's worth $500,000. We are assuming that it deserves $500,000. That is a possession. It's an asset due to the fact that it gives 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 mortgage, 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 offer the possessions and pay off the financial obligation. If you offer your home you 'd get the title, you can get the money and after that you pay it back to the bank.
But 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 financial obligation and you would get in your pocket $125,000, which is exactly what your initial deposit was however this is your equity.
But you might not assume it's constant and play with the spreadsheet a little Look at this website bit. However I, what I would, I'm presenting this since as we pay for the debt this number is going to get smaller. So, this number is getting smaller, let's say at some time this is just $300,000, then my equity is going to get bigger.
Now, what I've done here is, well, in fact before I get to the chart, let me really reveal you how I calculate the chart and I do this throughout 30 years and it goes by month. So, so you can picture 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 zero, which I do not reveal here, you obtained $375,000. Now, throughout 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 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 great person, I'm not going to default on my home mortgage so I make that first home loan payment that we computed, 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 gone up by exactly $410. Now, you're probably 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 mainly interest. Just $410 of it is primary. But as you, and after that you, and then, so as your loan balance goes down 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 mortgage once again. This is my brand-new loan balance. And notice, currently by month two, $2.00 more went to primary and $2.00 less went to interest. And over the course of 360 months you're visiting that it's a real, 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 bit, this is by month. So, this whole height, if you notice, this is the specific, this is exactly our mortgage 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 really pay down the principal, the actual loan quantity.
The majority of it went for the interest of the month. But as I start paying for 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 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 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 deduction. So, a great deal of times you'll hear monetary organizers or realtors tell you, hey, the advantage of purchasing your house 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 wish to be really clear with what deductible ways. So, let's for example, speak about the interest charges. So, this whole time over 30 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 Click here more monthly I get a smaller sized and smaller sized tax-deductible part of my real home loan payment. Out here the tax deduction is really extremely little. As I'm preparing yourself to pay off my entire mortgage and get the title of my home.
This does not suggest, let's state that, let's say in one year, let's state in one year I paid, I do not understand, I'm going to make up a number, I didn't calculate 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 state this deductible, and let's say prior to this, let's say 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 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. Just, this is just a rough price quote. 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 generally owed and just paid $25,000.