And we're presuming that it deserves $500,000. We are presuming that it's worth $500,000. That is an asset. It's an asset due to the fact that it gives you future advantage, the future benefit of having the ability to reside 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 possessions and this is all of your financial obligation and if you were essentially to sell the properties and settle the financial obligation. If you sell your house you 'd get the title, you can get the cash and then you pay it back to the bank.
But if you were to unwind this deal immediately 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.
However you might not presume it's constant and play with the spreadsheet a bit. However I, what I would, I'm introducing this because as we pay down the debt this number is going to get smaller sized. So, this number is getting smaller, let's say at some time this is only $300,000, then my equity is going to get larger.
Now, what I've done here is, well, in fact before I get to the chart, let me actually reveal you how I determine 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 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 borrowed $375,000. Now, over the course of 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 have not made any home mortgage payments yet.
So, now prior to I pay any of my payments, rather 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 home loan so I make that first mortgage payment that we calculated, 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 gone up by exactly $410. Now, you're most likely saying, hello, gee, I made a $2,000 payment, an approximately a $2,000 payment and my equity only increased by $410,000.
So, that extremely, in the beginning, your payment, your $2,000 payment is primarily interest. Only $410 of it is primary. However as you, and after that you, and after that, so as your loan 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 loan again. This is my new loan balance. And notification, 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 an actual, sizable distinction.
This is the interest and principal parts of our home loan payment. So, this entire height right here, this https://timesharecancellations.com/clickfunnels/ 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 precisely our home loan payment, this $2,129. Now, on that very first month you saw that of my $2,100 only $400 of it, this is the $400, only $400 of it went to actually pay for the principal, the real loan quantity.
Most of it chose the interest of the month. However as I start paying down 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 much 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 really goes to settle the loan.
Now, the last thing I want to discuss in this video without making it too long is this concept of a interest tax reduction. So, a lot of times you'll hear financial organizers or real estate agents tell you, hey, the advantage of buying your house 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 desire to be really clear with what deductible means. So, let's for circumstances, talk about the interest fees. 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 great deal of that is interest.
That $1,700 is tax-deductible. Now, as we go further and further every month I get a smaller sized and smaller sized tax-deductible portion of my real home mortgage payment. Out here the tax deduction is really extremely small. As I'm getting ready to pay off my entire 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 say in one year I paid, I don't know, I'm going to comprise 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 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 say, you understand, if I didn't have this home loan I would pay 35 percent taxes which would be about $35,000 in taxes for that year. Simply, 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 simply take it from the $35,000 that I would have generally owed and just paid $25,000.