Let's state that there is a home that I like, let's say that that is your home that I wish to buy. It has a price of, let's say that I require to pay $500,000 to buy that home, this is the seller of the home right here.
I wish to purchase it. I wish to buy your house. This is me right here. And I have actually been able to save up $125,000. I've been able to conserve up $125,000 but I would actually like to reside in that house 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 need for that house, which is basically $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 appear like, uh, uh, a great person with a great job who has an excellent credit rating.
We have to have that title of your house and when you pay off the loan we're going to provide you the title of your house. So what's going to happen 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 the house, the document that says who in fact owns the house, so this is the home title, this is the title of your house, home, house title. It will not go to me. It will go to the bank, the house title will go from the seller, perhaps even the seller's bank, perhaps they haven't paid off their 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 mortgage is. This vowing of the title for, as the, as the security for the loan, that's what a home mortgage is. how do mortgages work. And really it comes from old French, mort, suggests dead, dead, and the gage, suggests promise, I'm, I'm a hundred percent sure I'm mispronouncing it, however it originates from dead pledge.
When I settle the loan this promise of the title to the bank will die, it'll come back to me. And that's why it's called a dead promise or a home loan. And most likely since it comes from old French is the reason why we don't state mort gage. We state, home loan.
They're actually referring to the mortgage, mortgage, the mortgage loan. And what I desire to do in the rest of this video is use a little screenshot from a spreadsheet I made to really show you the math or really 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, home https://www.inhersight.com/companies/best/reviews/telecommute?_n=112289508 mortgage, or actually, even better, just go to the download, simply go to the downloads, downloads, uh, folder on your web internet browser, you'll see a lot of files and it'll be the file called home loan calculator, home loan calculator, calculator dot XLSX.
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But just go to this URL and then you'll see all of the files there and after that you can simply download this file if you want to have fun with it. But 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 Go to this website your spreadsheet without breaking the entire spreadsheet.
I'm buying a $500,000 house. It's a 25 percent down payment, so that's the $125,000 that I had actually conserved up, that I 'd spoken about right over there. And then the, uh, loan amount, well, I have the $125,000, I'm going to need to borrow $375,000. It computes it for us and after that I'm going to get a quite plain vanilla loan.
So, 30 years, it's going to be a 30-year fixed rate home mortgage, fixed rate, fixed rate, which suggests the interest rate will not alter. We'll discuss that in a bit. This 5.5 percent that I am paying on my, on the money that I obtained will not alter over the course of the thirty years.
Now, this little tax rate that I have here, this is to actually find out, what is the tax cost savings of the interest deduction on my loan? And we'll talk about that in a 2nd, we can disregard 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 this spreadsheet yourself - how reverse mortgages work.
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So, it's actually the yearly rates of interest, 5.5 percent, divided by 12 and many home loan are intensified on a month-to-month basis. So, at the end of on a monthly basis they see just how much money you owe and then they will charge you this much interest on that for the month.
It's in fact a quite intriguing problem. But for a $500,000 loan, well, a $500,000 home, a $375,000 loan over thirty years at a 5.5 percent interest rate. My home mortgage payment is going to be approximately $2,100. Now, right when I bought your home I desire to present a bit of vocabulary and we have actually spoken about this in some of the other videos.
And we're assuming that it's worth $500,000. We are assuming that it deserves $500,000. That is a possession. It's a property because it gives you future advantage, the future benefit of being able to reside in it. Now, there's a liability versus that possession, that's the home loan, that's the $375,000 liability, $375,000 loan or debt.
If this was all of your possessions and this is all of your financial obligation and if you were essentially to offer the possessions and settle the financial obligation. how do mortgages work. If you sell the house you 'd get the title, you can get the cash and then you pay it back to the bank.
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However if you were to unwind this deal instantly after doing it then you would have, you would have a $500,000 house, you 'd pay off your $375,000 in financial obligation and you would get in your pocket $125,000, which is precisely what your original down payment was but this is your equity.
However you might not assume it's constant and have fun 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 sized. So, this number is getting smaller sized, let's state eventually this is only $300,000, then my equity is going to get larger.
Now, what I've done here is, well, really before I get to the chart, let me actually show you how I determine the chart and I do this over the course of thirty years and it passes month. So, so you can picture that there's actually 360 rows here on the actual spreadsheet and you'll see that if you go and open it up.