And we're assuming that it deserves $500,000. We are presuming that it's worth $500,000. That is a possession. It's an asset due to the fact that it provides you future advantage, the future advantage of having the ability to live in it. Now, there's a liability versus that asset, that's the mortgage loan, that's the $375,000 liability, $375,000 loan or financial obligation.
If this was all of your properties and this is all of your financial obligation and if you were basically to sell the assets and pay off the financial obligation. If you offer your house you 'd get the title, you can get the money and then you pay it back to the bank.
But 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.
But you might not presume it's continuous and have fun with the spreadsheet a little bit. But 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 sized, let's state at some point 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 really reveal 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 think of that there's actually 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 don't 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 have not made any mortgage payments yet.
So, now prior to 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 mortgage so I make that first mortgage payment that we determined, that we computed 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 very first payment I now have $125,410 in equity. So, my equity has actually increased by precisely $410. Now, you're probably saying, hello, gee, I made a $2,000 payment, a roughly a $2,000 Look at this website payment and my equity just increased by $410,000.
So, that very, in the start, your payment, your $2,000 payment is mainly interest. Only $410 of it is primary. But as you, and then you, and after that, so as your loan balance decreases you're going to pay less interest here therefore each of your payments are going to be more weighted towards principal and less weighted towards interest.
This is your brand-new prepayment balance. I pay my home loan again. This is my brand-new loan balance. And notice, currently by month 2, $2.00 more went to principal and $2.00 less went to interest. And throughout 360 months you're visiting that it's an actual, large difference.
This is the interest and principal portions of our home mortgage payment. So, this whole height right here, this is, let me scroll down a bit, this is by month. So, this whole height, if you discover, this is the exact, this is precisely our mortgage payment, this $2,129. Now, on that really first month you saw that of my $2,100 only $400 of it, this is the $400, only $400 of it went to actually pay for the principal, the actual loan amount.
The majority of it went for the interest of the month. However as I begin paying down the loan, as the loan balance gets smaller and smaller sized, each of my payments, there's less interest to pay, let me do a much better color than that. There is less interest, let's state if we go out here, this is month 198, there, that last month there 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 idea of a interest tax reduction. So, a great deal of times you'll hear financial coordinators or real estate agents tell you, hey, the benefit of purchasing your house is that it, it's, it has tax benefits, and it does.
Your interest, not your entire payment. Your interest is tax deductible, deductible. And I wish to be very clear with what deductible means. So, let's for example, talk about the interest fees. So, this entire time over 30 years I am paying $2,100 a month or $2,129.29 a month. Now, at the beginning a great deal of that is interest.
That $1,700 is tax-deductible. Now, as we go further and further each month I get a smaller and smaller tax-deductible portion of my actual home loan payment. Out here the tax deduction is in fact very small. As I'm preparing yourself to pay off my whole mortgage and get the title of my house.
This doesn't suggest, let's state that, let's say in one year, let's state in one year I paid, I The original source do not understand, I'm going to comprise a number, I didn't calculate it on the spreadsheet. Let's state in year one, year one, I pay, I pay $10,000 in interest, $10,000 in interest.
And, but let's state $10,000 went to interest. To state this deductible, and let's state before this, let's say before 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 say, you understand, if I didn't have this mortgage I would pay 35 percent taxes which would be about $35,000 in taxes for that year. Just, this is simply a rough quote. Now, when you say that $10,000 is tax-deductible, the interest is tax-deductible, that does not imply that I can simply take it from the $35,000 that I would have usually owed and only paid $25,000.