Let's state that there is a home that I like, let's say that that is your home that I wish to acquire. It has a rate tag of, let's state that I require to pay $500,000 to purchase that home, this is the seller of the house right here.
I would like to buy it. I want to purchase your home. This is me right here. And I've had the ability to conserve 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 new color for the bank, so that is the bank right there.
Bank, can you lend me the rest of the amount 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 good person with a great job who has a great credit rating.
We have to have that title of the home and when you settle the loan we're going to offer you the title of the home. 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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However the title of the home, the file that states who actually owns your home, so this is the house title, this is the title of the home, house, house title. It will not go to me. It will go to the bank, the home title will go from the seller, perhaps even the seller's bank, perhaps they have not paid off their home mortgage, it will go to the bank that I'm obtaining from.
So, this is the security right here. That is technically what a home loan is. This vowing of the title for, as the, as the security for the loan, that's what a mortgage is. how to reverse mortgages work. And in fact it originates from old French, mort, means dead, dead, and the gage, suggests pledge, I'm, I'm a hundred percent sure I'm mispronouncing it, however it comes from dead pledge.
When I pay off the loan this promise of the title to the bank will die, it'll come back to me. Which's why it's called a dead pledge or a home loan. And most likely due to the fact that it originates from old French is the reason we do not state mort gage. We state, mortgage.
They're actually describing the home mortgage, home mortgage, the home loan. And what I wish to do in the rest of this video is utilize a little screenshot from a spreadsheet I made to really reveal you the mathematics or in fact show you what your home loan payment is going to. And you can download, you can download this spreadsheet at Khan Academy, khanacademy.org/downloads, downloads, slash mortgage calculator, home loan, or actually, even better, just go to the download, just go to the downloads, downloads, uh, folder on your web browser, you'll see a lot of files and it'll be the file called mortgage calculator, home mortgage calculator, calculator dot XLSX.
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But simply go to this URL and then you'll see all of the files there and then you can just download this file if you desire to have fun with it. But what it does here is in this sort of dark brown color, these are the presumptions that you could input which you can change these cells in your spreadsheet without breaking the entire spreadsheet.
I'm buying a $500,000 house. It's a 25 percent deposit, so that's the $125,000 that I had saved up, that I 'd discussed right over there. And after that 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 then I'm going to get a pretty plain vanilla loan.
So, thirty years, it's going to be a 30-year fixed rate home loan, repaired rate, repaired rate, which implies the rate of interest won't change. We'll talk about that in a bit. This 5.5 percent that I am paying on my, on the cash that I obtained will not change over the course of the thirty years.
Now, this little tax rate that I have here, this is to actually determine, what is the tax savings of the interest reduction on my loan? And we'll talk about that in a 2nd, we can neglect it for now. And after that these other things that aren't in brown, you shouldn't tinker these if you really do open this spreadsheet yourself - how do mortgages work.
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So, it's literally the annual rate of interest, 5.5 percent, divided by 12 and the majority of mortgage are compounded on a month-to-month basis. So, at the end of each month they see how much money you owe and then they will charge you this much interest on that for the month.
It's in fact a pretty intriguing issue. However for a $500,000 loan, well, a $500,000 home, a $375,000 loan over thirty years at a 5.5 percent rates of interest. My home https://www.greatplacetowork.com/certified-company/7022866 mortgage payment is going to be approximately $2,100. Now, right when I purchased the home I wish to introduce a little bit of vocabulary and we've discussed this in a few of the other videos.
And we're assuming that it deserves $500,000. We are presuming that it's worth $500,000. That is a possession. It's a property due to the fact that it gives you future advantage, the future benefit of being able to reside in it. Now, there's a liability against that asset, that's the mortgage, that's the $375,000 liability, $375,000 loan or debt.
If this was all of your properties and this is all of your debt and if you were essentially to sell the possessions and settle the debt. how mortgages work. If you offer the house you 'd get the title, you can get the cash and after that 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 home, you 'd pay off your $375,000 in debt and you would get in your pocket $125,000, which is precisely what your initial down payment was but this is your equity.
But you might not assume it's constant and have fun with the spreadsheet a little bit. However I, what I would, I'm presenting this since as we pay for the debt this number is going to get smaller. So, this number is getting smaller sized, let's state at some point this is just $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 in fact show you how I compute the chart and I do this throughout 30 years and it passes month. So, so you can think of that there's really 360 rows here on the actual spreadsheet and you'll see that if you go and open https://www.pinterest.com/wesleyfinancialgroup/ it up.