Let's state that there is a home that I like, let's state that that is your house that I want to purchase. It has a cost tag of, let's say that I require to pay $500,000 to purchase that home, this is the seller of your house right here.
I want to purchase it. I would like to purchase your home. This is me right here. And I've been able to save up $125,000. I've had the ability to save up $125,000 but I would truly like to live in that house 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 remainder of the quantity I require for that home, https://www.linkedin.com/ccompany/WesleyFinancialGroup 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 says, sure, you look like, uh, uh, a great man with a great task who has an excellent credit score.
We have to have that title of your 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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But the title of your house, the document that states who actually owns your home, so this is the home 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, perhaps even the seller's bank, perhaps 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 home mortgage is. This pledging of the title for, as the, as the security for the loan, that's what a home loan is. how do commercial mortgages work. And in fact it comes from old French, mort, means dead, dead, and the gage, means promise, I'm, I'm a hundred percent sure I'm mispronouncing it, however it comes from dead promise.
When I settle the loan this promise of the title to the bank will pass away, it'll return to me. Which's why it's called a dead promise or a home loan. And most likely because it comes from old French is the reason that we do not state mort gage. We say, home mortgage.
They're really describing the home mortgage, home loan, the mortgage. And what I want to do in the rest of this video is utilize a little screenshot from a spreadsheet I made to in fact reveal you the math or really reveal you what your home 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 loan, or in fact, even much better, simply go to the download, simply 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 home mortgage calculator, home mortgage calculator, calculator dot XLSX.
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But simply go to this URL and after that you'll see all of the files there and then you can simply download this file if you wish to play with it. However what it does here is in this kind of dark brown color, these are the assumptions that you might input which you can alter these cells in your spreadsheet without breaking the entire spreadsheet.
I'm buying a $500,000 home. It's a 25 percent down payment, so that's the $125,000 that I had saved up, that I 'd spoken about right there. And then the, uh, loan amount, well, I have the $125,000, I'm going to need to obtain $375,000. It determines 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 loan, repaired rate, fixed rate, which suggests the rates of interest will not alter. We'll talk about that in a bit. This 5.5 percent that I am paying on my, on the money 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 savings of the interest reduction on my loan? And we'll speak about that in a second, we can disregard it in the meantime. And then these other things that aren't in brown, you should not tinker these if you in fact do open up this spreadsheet yourself - explain how mortgages work.
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So, it's actually the annual rates of interest, 5.5 percent, divided by 12 and the majority of home loan are intensified on a month-to-month basis. So, at the end of each month they see how much cash 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 house, a $375,000 loan over thirty years at a 5.5 percent interest rate. My mortgage payment is going to be approximately $2,100. Now, right when I bought your home I want to introduce a little bit of vocabulary and we have actually discussed Visit website this in a few of the other videos.
And we're presuming that it deserves $500,000. We are assuming that it's worth $500,000. That is a property. It's an asset due to the fact that it gives you future advantage, the future advantage of being able to reside in it. Now, there's a liability against 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 essentially to offer the assets and settle the financial obligation. how do mortgages work. If you sell your home 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 relax this transaction immediately after doing it then you would have, you would have a $500,000 house, 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 however this is your equity.
However you could not presume it's consistent and have fun with the spreadsheet a bit. But I, what I would, I'm introducing this because as we pay for the debt this number is going to get smaller. So, this number is getting smaller, let's say at some time this is only $300,000, then my equity is going to get larger.
Now, what I have actually done here is, well, really before I get to the chart, let me actually show you how I determine the chart and I do this over the course of thirty years and it passes month. So, so you can think of that there's really 360 rows here on the real spreadsheet and you'll see that if you go and open it up.