Let's state that there is a home that I like, let's say that that is your house that I want to buy. It has a price of, let's say that I require to pay $500,000 to purchase that house, this is the seller of the house right here.
I wish to buy it. I want to buy your home. This is me right here. And I have actually had the ability to conserve up $125,000. I have actually been able to conserve up $125,000 however I would really like to live in that home 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 lend me the rest of the quantity I require 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 seem like, uh, uh, a good man with a great task who has an excellent credit rating.
We need to have that title of your house and when you pay off the loan we're going to offer you the title of your 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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But the title of your home, the document that says who in fact owns your home, so this is the house title, this is the title of your house, house, home title. It will not go to me. It will go to the bank, the house title will go from the seller, maybe even the seller's bank, possibly they haven't paid off their home loan, it will go to the bank that I'm borrowing from.
So, this is the security right here. That is technically what a mortgage is. This promising of the title for, as the, as the security for the loan, that's what a mortgage is. how do reverse mortgages work. And in fact it originates from old French, mort, suggests dead, dead, and the gage, means promise, I'm, I'm a hundred percent sure I'm mispronouncing it, however it originates from dead pledge.
Once I settle the loan this pledge 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 mortgage. And most likely since it originates from old French is the reason we do not state mort gage. We say, home loan.
They're truly describing the mortgage, home loan, the mortgage. And what I desire to do in the rest of this video is utilize a little screenshot from a spreadsheet I made to really show you the math or in fact show you what your mortgage payment is going to. And you can download, you can download this spreadsheet at Khan Academy, khanacademy.org/downloads, downloads, slash home mortgage calculator, mortgage, or in fact, even much better, simply go to the download, just go to the downloads, downloads, uh, folder on your web browser, you'll see a bunch of files and it'll be the file called mortgage calculator, home loan 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 after that you can simply download this file if you want to have fun with it. However what it does here remains in this kind of dark brown color, these are the assumptions that you could input and that you can change these cells in your spreadsheet without breaking the whole spreadsheet.
I'm purchasing a $500,000 home. It's a 25 percent deposit, so that's the $125,000 that I had actually saved up, that I 'd talked about right there. And then the, uh, loan quantity, well, I have the $125,000, I'm going to have to obtain $375,000. It computes it for us and after that I'm going to get a quite plain vanilla loan.
So, thirty years, https://www.facebook.com/wesleyfinancialgroup it's going to be a 30-year set rate home loan, fixed rate, fixed rate, which indicates the rates of interest won't alter. We'll talk about that in a little 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 figure out, what is the tax cost savings of the interest reduction on my loan? And we'll discuss that in a 2nd, we can ignore it in the meantime. And then these other things that aren't in brown, you should not tinker these if you really do open up this spreadsheet yourself - how do 2nd mortgages work.
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So, it's literally the yearly interest rate, 5.5 percent, divided by 12 and most home loan are compounded on a monthly basis. So, at the end of each month they see how much cash you owe and then they will charge you this much interest on that for the month.
It's really a pretty intriguing issue. But for a $500,000 loan, well, a $500,000 house, a $375,000 loan over 30 years at a 5.5 percent rate of interest. My home mortgage payment is going to be approximately $2,100. Now, right when I purchased the home I want to introduce a bit of vocabulary and we've talked about this in some of the other videos.
And we're presuming that it's worth $500,000. We are assuming that it's worth $500,000. That is a possession. It's an asset because it gives you future benefit, the future benefit of having the ability to live in it. Now, there's a liability versus that asset, that's the home loan, 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 basically to offer the properties and settle the debt. how do points work in mortgages. If you offer the home you 'd get the title, you can get the cash and then you pay it back to the bank.
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But if you were to unwind this transaction 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 precisely what your initial down payment was but this is your equity.
But you might not assume it's constant and play with the spreadsheet a bit. But I, what I would, I'm presenting this since as we pay for the financial obligation this number is going to get smaller sized. 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've done here is, well, in fact before I get to the chart, let me in fact show you how I calculate the chart and I do this over the course of 30 years and it goes by month. So, so you can envision that there's actually 360 rows here on the actual spreadsheet and you'll see that if you go and open it up.