Let's say that there is a home that I like, let's say that that is your house that I want to purchase. It has a price of, let's state that I require to pay $500,000 to buy that home, this is the seller of the home right here.
I wish to buy it. I would like 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 truly like to reside 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 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 states, sure, you look like, uh, uh, a great guy with an excellent task who has an excellent credit ranking.
We need to have that title of your house and once you pay off the loan we're going to provide you the title of the house. So what's going to take place 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 home, the file that says who really owns your house, so this is the home title, this is the title of the home, home, 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, maybe they have not paid off their 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 pledging 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 originates from old French, mort, implies dead, dead, and the gage, implies pledge, I'm, I'm a hundred percent sure I'm mispronouncing it, but it originates from dead promise.
When 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 most likely since it originates from old French is the reason we do not state mort gage. We say, mortgage.
They're really referring to the mortgage, home mortgage, the home mortgage loan. And what I desire to perform in the rest of this video is utilize a little screenshot from a spreadsheet I made to really reveal you the math or in fact reveal 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 home loan 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 internet browser, you'll see a lot of files and it'll be the file called home loan calculator, home mortgage calculator, calculator dot XLSX.
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However simply go to this URL and then you'll see all of the files there and after that you can simply download this file if you want to play with it. But what it does here remains in this kind of dark brown color, these are the assumptions that you could input which you can change these cells in your spreadsheet without breaking the entire spreadsheet.
I'm buying a $500,000 house. It's a 25 percent down payment, so that's the $125,000 that I had actually saved up, that I 'd talked about right over there. And then the, uh, loan amount, well, I have the $125,000, I'm going to have to obtain $375,000. It determines https://www.inhersight.com/companies/best/industry/finance it for us and then I'm going to get a pretty plain vanilla loan.
So, thirty years, it's going to be a 30-year set rate mortgage, repaired rate, fixed rate, which suggests the rate of interest won't change. We'll talk about that in a bit. This 5.5 percent that I am paying on my, on the cash that I obtained will not alter throughout the 30 years.
Now, this little tax rate that I have here, this is to actually determine, what is renting my timeshare week the tax savings of the interest deduction on my loan? And we'll speak about that in a 2nd, we can ignore it for now. And then these other things that aren't in brown, you should not mess with these if you really do open up this spreadsheet yourself - how do down payments work on mortgages.
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So, it's literally the annual rates of interest, 5.5 percent, divided by 12 and many home loan are intensified on a monthly basis. So, at the end of monthly they see just how much cash you owe and after that they will charge you this much interest on that for the month.
It's in fact a quite fascinating issue. However for a $500,000 loan, well, a $500,000 home, a $375,000 loan over thirty years at a 5.5 percent rates of interest. My mortgage payment is going to be approximately $2,100. Now, right when I purchased the house I want to introduce a bit of vocabulary and we have actually discussed this in a few of the other videos.
And we're presuming that it's worth $500,000. We are assuming that it's worth $500,000. That is a property. It's a possession because it gives you future benefit, the future benefit of having the ability to live in it. Now, there's a liability versus that asset, 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. how do reverse mortgages really work. If you sell your home you 'd get the title, you can get the money and after that you pay it back to the bank.
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But 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 pay off your $375,000 in debt and you would get in your pocket $125,000, which is precisely what your original deposit was but this is your equity.
However you might not presume it's consistent and play with the spreadsheet a bit. However I, what I would, I'm presenting this since as we pay for the financial obligation this number is going to get smaller sized. So, this number is getting smaller, let's say at some time this is only $300,000, then my equity is going to get bigger.
Now, what I've done here is, well, really prior to I get to the chart, let me really 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 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.