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What I desire to finish with this video is discuss what a home loan is but I believe many of us have a least a basic sense of it. However even better than that really go into the numbers and understand a bit of what you are really doing when you're paying a home mortgage, what it's comprised of and how much of it is interest versus how much of it is in fact paying down the loan.
Let's say that there is a home that I like, let's state that that is your home that I would like to purchase (what is the current interest rate for mortgages). It has a rate tag of, let's state that I need to pay $500,000 to buy that house, this is the seller of the house right here.
I would like to buy it. I want to buy your home. This is me right here - why do mortgages get sold. And I've been able to save up $125,000. what is the interest rate for mortgages. I have actually had the ability to conserve up $125,000 but I would actually like to reside 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 provide me the rest of the amount 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 says, sure, you appear like, uh, uh, a good man with an excellent job who has an excellent credit ranking.
We need to have that title of your home and as soon as 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.
But the title of your house, the document that says who really owns the home, so this is the house title, this is the title of your home, house, house title. It will not go to me. It will go to the bank, the home title will go from the seller, perhaps even the seller's bank, perhaps they have not paid off their home mortgage, 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 mortgage is. And actually it originates from old French, mort, suggests dead, dead, and the gage, implies pledge, I'm, I'm a hundred percent sure I'm mispronouncing it, however it originates from dead promise.
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As soon as I pay off 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 due to the fact that it originates from old French is the reason that we do not say mort gage. why are reverse mortgages bad. We say, home mortgage.
They're actually referring to the mortgage, home mortgage, the home loan. And what I want to do in the rest of this video is utilize a little screenshot from a spreadsheet I made to actually show you the mathematics or actually 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 mortgage, or actually, even much better, just go to the download, just go to the downloads, downloads, uh, folder on your web browser, you'll see a lot of files and it'll get more info be the file called home loan calculator, home mortgage calculator, calculator dot XLSX.
However just go to this URL and after that you'll see all of the files there and after that you can just download this file if you want to play with it. However what it does here remains in this sort of dark brown color, these are the assumptions that you might input and that you can alter these cells in your spreadsheet without breaking the entire spreadsheet.
I'm purchasing a $500,000 house. It's a 25 percent deposit, so that's the $125,000 that I had conserved up, that I 'd spoken about right over there. And then the, uh, loan quantity, 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, 30 years, it's going to be a 30-year fixed rate mortgage, fixed rate, repaired rate, which means the rate of interest won't alter. We'll speak about that in a little bit. This 5.5 percent that I am paying on my, on the money that I obtained will not change throughout the 30 years.
Now, this little tax rate that I have here, this is to actually find out, what is the tax savings of the interest deduction on my loan? And we'll talk about that in a 2nd, we can overlook it in the meantime. And then these other things that aren't in brown, you shouldn't tinker these if you really do open this spreadsheet yourself.
So, it's literally the annual rate of interest, 5.5 percent, divided by 12 and most home loan are intensified on a regular monthly basis. So, at the end of each month they see just how much cash you owe and then they will charge you this much interest on that for the month.
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It's really a quite fascinating 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 bought your home I wish to present a bit of vocabulary and we've talked about this in a few of the other videos.
And we're presuming that it deserves $500,000. We are presuming that it's worth $500,000. That is a property. It's an asset because it provides you future benefit, the future benefit of having the ability to reside in it. Now, there's a liability versus 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 possessions and this is all of your financial obligation and if you were basically to offer the possessions and pay off the financial obligation. If you sell your house you 'd get the title, you can get the cash and then you pay it back to the bank.
But if you were to unwind this transaction instantly 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 initial down payment was however this is your equity.