Let's say that there is a home that I like, let's say that that is your home that I want to buy. It has a cost tag of, let's state that I require to pay $500,000 to buy that home, this is the seller of your home right here.
I wish to buy it. I would like to buy your house. This is me right here. And I've had the ability to conserve up $125,000. I've been able to conserve up $125,000 but I would actually like to reside in that home so I go to a bank, I go to a bank, get a brand-new color for the bank, so that is the bank right there.
Bank, can you provide me the remainder of the quantity I require for that house, which is essentially $375,000. I'm putting 25 percent down, this right, this right, this number right here, that is 25 percent of $500,000. So, I ask the bank, can I have a loan for the balance? Can I have a $375,000 loan? And the bank says, sure, you look like, uh, uh, a nice man with a good job who has an excellent credit ranking.
We have to have that title of the house and as soon as you pay off the loan we're going to give you the title of your home. So what's going to take place here is we're going to have the loan is going to go to me, so it's $375,000, $375,000 loan.
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But the title of your home, the document that says who in fact owns the house, so this is the house title, this is the title of the home, house, house title. It will not go to me. It will go to the bank, the home title will go from the seller, perhaps even the seller's bank, possibly they haven't settled their home mortgage, it will go to the bank that I'm borrowing from.
So, this is the security right here. That is technically what a home loan is. This pledging of the title for, as the, as the security for the loan, that's what a home mortgage is. reverse mortgages how do they work. And in fact it comes from old French, mort, indicates dead, dead, and the gage, indicates promise, I'm, I'm a hundred percent sure I'm mispronouncing it, but it comes from dead promise.
As soon as I pay off the loan this promise of the title to the bank will pass away, it'll come back to me. And that's why it's called a dead pledge or a home mortgage. And most likely because it originates from old French is the reason that we do not say mort gage. We say, mortgage.
They're actually referring to the home loan, mortgage, the mortgage. And what I wish to carry out in the rest of this video is use a little screenshot from a spreadsheet I made to really show you the mathematics or in fact show you what your home mortgage payment is going to. And you can download, you can download this spreadsheet at Khan Academy, khanacademy.org/downloads, downloads, slash mortgage calculator, mortgage, or actually, even better, simply go to the download, just go to the downloads, downloads, uh, folder on your web browser, you'll see a bunch of files and it'll be the file called mortgage calculator, home mortgage calculator, calculator dot XLSX.
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But simply go to this URL and then you'll see all of the files there and then you can just download this file if you desire to have fun with it. However what it does here remains in this type of dark brown color, these are the presumptions that you might input which you can alter these cells in your spreadsheet without breaking the entire spreadsheet.
I'm buying a $500,000 home. It's a 25 percent deposit, so that's the $125,000 that I had actually conserved up, that I 'd spoken about right there. And then the, uh, loan quantity, well, I have the $125,000, I'm going to need to borrow $375,000. It computes it for us and then I'm going to get a pretty plain vanilla loan.
So, 30 years, it's going to be a 30-year fixed rate home loan, fixed rate, fixed rate, which suggests the interest rate will not change. We'll speak about that in a bit. This 5.5 percent that I am paying on my, on the money that I borrowed will not change over the course of the thirty years.
Now, this little tax rate that I have here, this is to really find out, what is the tax cost savings of the interest deduction on my loan? And we'll discuss that in a 2nd, we can ignore it in the meantime. And after that these other things that aren't in brown, you should not tinker these if you actually do open up this spreadsheet yourself - how mortgages work.
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So, it's literally the yearly interest rate, 5.5 percent, divided by 12 and the majority of mortgage are intensified on https://www.dandb.com/businessdirectory/wesleyfinancialgroupllc-franklin-tn-88682275.html a monthly basis. So, at the end of every month they see how much money you owe and after that they will charge you this much interest on that for the month.
It's really a quite fascinating problem. But for a $500,000 loan, well, a $500,000 house, a $375,000 loan over thirty years at a 5.5 percent interest rate. My mortgage payment is going to be roughly $2,100. Now, right when I purchased the home I desire to introduce a bit of vocabulary and we've discussed this in some of the other videos.
And we're presuming that it deserves $500,000. We https://www.linkedin.com/ccompany/WesleyFinancialGroup are presuming that it deserves $500,000. That is an asset. It's a property due to the fact that it offers you future benefit, the future advantage of being able to live in it. Now, there's a liability against that possession, 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 debt and if you were basically to sell the assets and pay off the debt. how do mortgages work in the us. 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.
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However if you were to relax this deal immediately after doing it then you would have, you would have a $500,000 home, you 'd settle your $375,000 in debt and you would get in your pocket $125,000, which is precisely what your initial deposit was but this is your equity.
But you could not assume it's constant and play with the spreadsheet a bit. However I, what I would, I'm presenting this because as we pay down the financial obligation this number is going to get smaller. So, this number is getting smaller sized, let's say at some time this is just $300,000, then my equity is going to get bigger.
Now, what I have actually done here is, well, actually before I get to the chart, let me really reveal you how I calculate the chart and I do this throughout thirty years and it passes month. So, so you can imagine that there's actually 360 rows here on the actual spreadsheet and you'll see that if you go and open it up.