And we're assuming that it deserves $500,000. We are presuming that it deserves $500,000. That is an asset. It's a property due to the fact that it offers you future advantage, the future advantage of being able to live in it. Now, there's a liability versus that property, that's the mortgage, that's the $375,000 liability, $375,000 loan or debt.
If this was all of your possessions and this is all of your debt and if you were basically to sell the possessions and pay off the financial obligation. If you offer your house you 'd get the title, you can get the cash and after that you pay it back to the bank.
However 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 settle your $375,000 in financial obligation and you would get in your pocket $125,000, which is exactly what your original deposit was but this is your equity.
But you could not assume 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 financial obligation this number is going to get smaller sized. So, this number is getting smaller, let's state 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 prior to I get to the chart, let me in fact show you how I determine 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 really 360 rows here on the real spreadsheet and you'll see that if you go and open it up.
So, on month absolutely no, which I do not show here, you obtained $375,000. Now, throughout 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 loan so I make that first home mortgage payment that we calculated, 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 increased by exactly $410. Now, you're most likely saying, hello, gee, I made a $2,000 payment, an approximately a $2,000 payment and my equity just 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 after that you, and after that, so as your loan balance goes down you're going to pay less interest here and so 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 home mortgage once again. This is my brand-new loan balance. And notification, currently by month two, $2.00 more went to primary and $2.00 less went to interest. And over the course of 360 months you're visiting that it's a real, sizable distinction.
This is the interest and principal portions of our home loan payment. So, this whole height right here, this is, let me scroll down a little bit, this is by month. So, this entire height, if you see, this is the precise, this is precisely our home Have a peek here 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 really pay for the principal, the actual loan amount.
The majority of it opted for the interest of the month. However as I begin paying down the loan, as the loan balance gets smaller and smaller, each of my payments, there's less interest to pay, let me do a 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 https://www.sendspace.com/file/p41bay 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 deduction. So, a lot of times you'll hear financial planners or real estate agents tell you, hey, the advantage of purchasing your house 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 want to be very clear with what deductible methods. So, let's for example, talk about the interest costs. So, this entire 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 further every month I get a smaller sized and smaller sized tax-deductible part of my real mortgage payment. Out here the tax reduction is really extremely little. As I'm preparing yourself to settle my entire mortgage and get the title of my house.
This does not mean, let's state that, let's state in one year, let's state in one year I paid, I do not know, I'm going to make up a number, I didn't compute it on the spreadsheet. Let's say 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 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 state, you understand, if I didn't have this home mortgage I would pay 35 percent taxes which would be about $35,000 in taxes for that year. Simply, this is simply a rough price quote. Now, when you state that $10,000 is tax-deductible, the interest is tax-deductible, that does not suggest that I can just take it from the $35,000 that I would have normally owed and only paid $25,000.