And we're assuming that it deserves $500,000. We are presuming that it deserves $500,000. That is an asset. It's an asset because it gives you future advantage, the future advantage of having the ability to live in it. Now, there's a liability versus 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 properties and this is all of your debt and if you were essentially to offer the properties and settle the financial obligation. If you offer your house 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 unwind this deal right away after doing it then you would have, you would have a $500,000 home, you 'd pay off your $375,000 in financial obligation and you would get in your pocket $125,000, which is exactly what your original down payment was but this is your equity.
But you could not presume it's consistent and play with the spreadsheet a little bit. However I, what I would, I'm introducing this since as we pay for the debt 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 before I get to the chart, let me really show you how I calculate the chart and I do this over the course of 30 years and it passes month. So, so you can envision that there's in fact 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 do not show 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 have not made any home mortgage payments yet.
So, now before 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 a great guy, I'm not going to default on my mortgage so I make that very first home mortgage 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 very first payment I now have $125,410 in equity. So, my equity has actually increased by precisely $410. Now, you're probably saying, hello, gee, I made a $2,000 payment, a roughly 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. Just $410 of it is primary. However as you, and then you, and after that, so as your loan https://timesharecancellations.com/time-share-cancellation-resources/ 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 again. This is my new loan balance. And notice, currently 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 going to see that it's an actual, large distinction.
This is the interest and primary parts of our home loan 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 discover, this is the precise, 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 in fact pay down the principal, the actual loan amount.
Most of it chose the interest of the month. However as I begin 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 state 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 pay off the loan.
Now, the last thing I want to talk 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 planners or real estate agents tell you, hey, the advantage of buying your home 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 really clear with what deductible methods. So, let's for example, talk about the interest costs. So, this entire time over 30 years I am paying $2,100 a month or $2,129.29 a month. Now, at the starting 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 tax-deductible portion of my real home mortgage payment. Out here the tax deduction is actually extremely small. As I'm preparing yourself to pay off my entire home loan and get the title of my house.
This does not mean, 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 make up a number, I didn't compute 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, but let's state $10,000 went to interest. To say this deductible, and let's say 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 say I was paying roughly 35 percent on that $100,000.
Let's say, you understand, if I didn't have this home mortgage I would pay 35 percent taxes which would have to do with $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 indicate that I can simply take it from the $35,000 that I would have usually owed and just paid $25,000.