And we're presuming that it's worth $500,000. We are assuming that it's worth $500,000. That is a possession. It's an asset because it gives you future benefit, the future benefit of being able to reside in it. Now, there's a liability versus that asset, that's the home mortgage 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 financial obligation and if you were essentially to sell the assets and settle the financial obligation. If you sell your home you 'd get the title, you can get the cash and then you pay it back to the bank.
However if you were to relax this deal right away after https://gertonegkj.doodlekit.com/blog/entry/10591025/how-to-get-rid-of-a-timeshare-legally 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 precisely what your original down payment was however this is your equity.
But you might not assume it's constant and have fun with the spreadsheet a bit. However I, what I would, I'm introducing this because as we pay for the debt this number is going to get smaller. So, this number is getting smaller, let's say eventually this is just $300,000, then my equity is going to get larger.
Now, what I have actually done here is, well, in fact prior to I get to the chart, let me actually show you how I compute the chart and I do this over the course of 30 years and it goes by month. So, so you can imagine that there's really 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 don't show 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 have not 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 an excellent person, I'm not going to default on my home loan so I make that very first mortgage payment that we computed, that we computed 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 stating, hi, gee, I made a $2,000 payment, a roughly a $2,000 payment and my equity just increased by $410,000.
So, that very, in the beginning, your payment, your $2,000 payment is mostly interest. Just $410 of it is principal. But as you, and then 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 new prepayment balance. I pay my home loan once again. This is my brand-new loan balance. And notice, already 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 an actual, substantial difference.
This is the interest and principal parts 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 entire height, if you observe, this is the precise, this is exactly our home 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 in fact pay for the principal, the actual loan quantity.
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 sized, 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 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 really goes to settle the loan.
Now, the last thing I want to talk 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 organizers or real estate agents inform you, hey, the benefit of purchasing your home 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 wish to be extremely clear with what deductible ways. So, let's for example, speak about the interest fees. So, this entire 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 even more each month I get a smaller and smaller sized tax-deductible part of my real home mortgage payment. Out here the tax deduction is actually really little. As I'm getting ready to pay off my whole home mortgage and get the title of my home.
This doesn't mean, let's state that, let's state in one year, let's state in one year I paid, I don't understand, I'm going to comprise 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 state $10,000 went to interest. To say this deductible, and let's state prior to this, let's state before 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 mortgage I would pay 35 percent taxes which would have to do with $35,000 in taxes for that year. Simply, this is simply a rough quote. Now, when you state that $10,000 is tax-deductible, the interest is tax-deductible, that does not imply that I can simply take it from the $35,000 that I would have normally owed and only paid $25,000.