And we're http://johnnyovql608.cavandoragh.org/how-does-a-timeshare-work assuming that it's worth $500,000. We are assuming that it's worth $500,000. That is a property. It's a possession due to the fact that it provides you future benefit, the future benefit of being able to live in it. Now, there's a liability against that asset, 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 debt and if you were essentially to offer the possessions and pay off the financial obligation. If you offer your home you 'd get the title, you can get the cash and then you pay it back to the bank.
But if you were to relax this transaction right away 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 exactly what your original deposit was however this is your equity.
But you might not presume it's consistent and play with the spreadsheet a bit. However I, what I would, I'm introducing this since as we pay down the financial obligation this number is going to get smaller sized. So, this number is getting smaller sized, 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, actually before I get to the chart, let me actually show you how I compute the chart and I do this throughout thirty years and it goes by month. So, so you can picture 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 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, bear 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 mortgage payments yet.
So, now prior to I pay any of my payments, rather of owing $375,000 at the end of the very 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 very first home loan payment that we determined, that we calculated right over here.
Now, this right here, what I, little asterisk here, this is my equity now. So, keep in mind, 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 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 only increased by $410,000.
So, that really, in the beginning, your payment, your $2,000 payment is mostly interest. Just $410 of it is primary. But as you, and then you, and then, so as your loan balance decreases you're going to pay less interest here therefore 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 mortgage once again. This is my new loan balance. And notification, already by month 2, $2.00 more went to principal and $2.00 less went to interest. And over the course of 360 months you're visiting that it's a real, substantial distinction.
This is the interest and principal portions of our mortgage payment. So, this whole height right here, this is, let me scroll down a bit, this is by month. So, this entire height, if you discover, this is the precise, this is precisely our home mortgage 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, just $400 of it went to in fact pay down the principal, the real loan amount.
Most of it opted for the interest of the month. But as I begin paying for the loan, as the loan balance gets smaller 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 state if we head out here, this is month 198, there, that last month there was less interest so more of my $2,100 in fact goes to settle the loan.
Now, the last thing I wish to discuss in this video without making it too long is this concept of a interest tax reduction. So, a great deal of times you'll hear financial planners or realtors inform you, hey, the benefit of buying 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 desire to be really clear with what deductible ways. So, let's for circumstances, 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 beginning a great deal of that is interest.
That $1,700 is tax-deductible. Now, as we go even more and further each month I get a smaller sized and smaller sized tax-deductible part of my actual home loan payment. Out here the tax deduction is really really small. As I'm preparing yourself to pay off my entire home mortgage and get the title of my house.
This doesn't imply, let's say that, let's say in one year, let's state in one year I paid, I do not know, I'm going to comprise a number, I didn't calculate 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, but let's state $10,000 went to interest. To say this deductible, and let's say prior to this, let's state prior to this I was making $100,000. Let's put the loan aside, let's say 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 have to do with $35,000 in taxes for that year. Just, this is just a rough quote. Now, when you say 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 usually owed and only paid $25,000.