Let's state that there is a home that I like, let's state that that is your house that I want to acquire. It has a price of, let's state that I require to pay $500,000 to purchase that house, this is the seller of your house right here.
I want to purchase it. I wish to buy your house. This is me right here. And I have actually had the ability to save up $125,000. I've had the ability to conserve up $125,000 but I would really like to live 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 remainder of the quantity I need for that home, which is essentially $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 states, sure, you look like, uh, uh, a great man with a good job who has a good credit score.
We need to have that title of the house and as soon as you settle 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 the house, the file that says who actually owns your home, so this is the home title, this is the title of your house, house, house title. It will not go to me. It will go to the bank, the house title will go from the seller, perhaps even the seller's bank, maybe they have not paid off their home loan, it will go to the bank that I'm obtaining from.
So, this is the security right here. That is technically what a mortgage is. This vowing of the title for, as the, as the security for the loan, that's what a home mortgage is. how do mortgages work in the us. And really it comes from old French, mort, indicates dead, dead, and the gage, implies pledge, I'm, I'm a hundred percent sure I'm mispronouncing it, however it comes from dead promise.
As soon as I settle 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 promise or a home loan. And probably since it originates from old French is the reason that we don't say mort gage. We say, home loan.
They're truly describing the home loan, home loan, the home mortgage loan. And what I wish to perform in the rest of this video is i want to sell my timeshare without upfront fees use a little screenshot from a spreadsheet I made to actually reveal you the math or really 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 mortgage calculator, home mortgage, or actually, even better, just go to the download, simply go to the downloads, downloads, uh, folder on your web internet browser, you'll see a lot of files and it'll be the file called home mortgage calculator, mortgage calculator, calculator dot XLSX.
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However just go to this URL and after that 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 is in this sort of dark brown color, these are the presumptions that you might input and that you can change these cells in your spreadsheet without breaking the entire spreadsheet.
I'm purchasing a $500,000 house. It's a 25 percent down payment, so that's the $125,000 that I had actually conserved up, that I 'd discussed right there. And then 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 after that I'm going to get a quite plain vanilla loan.
So, thirty years, it's going to be a 30-year fixed rate home mortgage, repaired rate, fixed rate, which suggests the interest rate won't alter. We'll discuss that in a bit. This 5.5 percent that I am paying on my, on the money that I borrowed will not alter over the course of the 30 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 speak about that in a second, we can overlook it in the meantime. And after that these other things that aren't in brown, you shouldn't mess with these if you really do open this spreadsheet yourself - how do reverse mortgages work after death.
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So, it's actually the yearly interest rate, 5.5 percent, divided by 12 and the majority of mortgage are compounded on a monthly basis. So, at the end of on a monthly basis they see just how much money you owe and after that they will charge you this much interest on that for the month.
It's actually a quite interesting issue. But for a $500,000 loan, well, a $500,000 home, a $375,000 loan over 30 years at a 5.5 percent rate of interest. My mortgage payment is going to be roughly $2,100. Now, right when I bought your house I wish to present a little 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 deserves $500,000. That is a possession. It's a property since it offers you future benefit, the future benefit of having the ability to live in it. Now, there's a liability against that possession, that's the home mortgage loan, that's the $375,000 liability, $375,000 loan or financial obligation.
If this was all of your assets and this is all of your financial obligation and if you were essentially to offer the properties and pay off the debt. how home mortgages work. If you sell your house you 'd get the title, you can get the money and after that you pay it back to the bank.
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However if you were to unwind this transaction immediately after doing it then you would have, you would have a $500,000 home, you 'd settle your $375,000 in debt and you would get in your pocket $125,000, which is exactly what your original down payment was but this is your equity.
However you could not presume it's continuous and have fun with the spreadsheet a bit. However I, what I would, I'm presenting 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 point this is only $300,000, then my equity is going to get larger.
Now, what I've done here is, well, really prior to I get to the chart, let me in fact show you how I determine the chart and I do this wesley financial group cost over the course of thirty years and it passes month. So, so you can picture that there's in fact 360 rows here on the actual spreadsheet and you'll see that if you go and open it up.