And we're presuming that it's worth $500,000. We are presuming that it's worth $500,000. That is a possession. It's a property because it offers you future benefit, the future benefit of being able to live 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 debt.
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 money and after that you pay it back to the bank.
But if you were to relax this deal instantly 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 precisely what your original down payment was however this is your equity.
But you might not presume it's constant and play with the spreadsheet a bit. But 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 only $300,000, then my equity is going to get larger.
Now, what I have actually done here is, well, really before I get to the chart, let me in fact reveal you how I compute the chart and I do this throughout 30 years and it goes by 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.
So, on month zero, which I don't show here, you obtained $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 haven't 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 first month I owe $376,718. Now, I'm a hero, I'm not going to default on my home mortgage so I make that first home loan payment that we determined, that we determined right over here.
Now, this right here, what I, little asterisk here, this is my equity now. So, remember, I began with $125,000 of equity. After paying one loan balance, after, after my first payment I now have $125,410 in equity. So, my equity has actually gone up by exactly $410. Now, you're most likely saying, hi, gee, I made a $2,000 payment, an approximately 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 primarily interest. Only $410 of it is principal. However as you, and then you, and after that, so as your loan balance goes down you're going to pay less interest here and so each Visit this link 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 again. This is my brand-new follow this link loan balance. And notification, currently by month two, $2.00 more went to principal and $2.00 less went to interest. And throughout 360 months you're going to see that it's a real, large distinction.
This is the interest and principal portions of our mortgage payment. So, this entire height right here, this is, let me scroll down a little bit, this is by month. So, this whole height, if you see, this is the precise, this is precisely our home loan payment, this $2,129. Now, on that extremely first month you saw that of my $2,100 only $400 of it, this is the $400, only $400 of it went to in fact pay down the principal, the real loan quantity.
Most of it went for the interest of the month. However as I begin paying down the loan, as the loan balance gets smaller sized and smaller, 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 go out here, this is month 198, there, that last month there was less interest so more of my $2,100 actually goes to settle the loan.
Now, the last thing I wish to talk about in this video without making it too long is this concept of a interest tax deduction. So, a great deal of times you'll hear financial planners or real estate agents inform you, hey, the advantage of purchasing your house is that it, it's, it has tax benefits, and it does.
Your interest, not your whole payment. Your interest is tax deductible, deductible. And I wish to be really clear with what deductible ways. So, let's for example, discuss the interest charges. So, this whole time over thirty years I am paying $2,100 a month or $2,129.29 a month. Now, at the starting a lot of that is interest.
That $1,700 is tax-deductible. Now, as we go even more and even more every month I get a smaller sized and smaller sized tax-deductible part of my real home loan payment. Out here the tax reduction is in fact very small. As I'm preparing to settle my entire home loan and get the title of my home.
This does not imply, let's say that, let's say in one year, let's say in one year I paid, I don't know, I'm going to make up a number, I didn't compute it on the spreadsheet. Let's state in year one, year one, I pay, I pay $10,000 in interest, $10,000 in interest.
And, however let's say $10,000 went to interest. To state this deductible, and let's state before 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 mortgage I would pay 35 percent taxes which would be about $35,000 in taxes for that year. Simply, this is just a rough quote. Now, when you say 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 only paid $25,000.