Let's say that there is a home that I like, let's state that that is your home that I would like to buy. It has a price tag of, let's say that I require to pay $500,000 to purchase that home, this is the seller of the home right here.
I wish to purchase it. I want to purchase the home. This is me right here. And I have actually had the ability to save up $125,000. I've had the ability to save up $125,000 however 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 lend me the https://www.bintelligence.com/blog/2020/2/17/34-companies-named-2020-best-places-to-work rest of the amount I require for that home, https://www.businesswire.com/news/home/20200115005652/en/Wesley-Financial-Group-Founder-Issues-New-Year%E2%80%99s which is basically $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 good man with an excellent job who has a great credit rating.
We need to have that title of the home and once you settle the loan we're going to give you the title of your home. So what's going to occur 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 home, the file that says who actually owns your home, so this is the house title, this is the title of your house, 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 home loan, it will go to the bank that I'm obtaining 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 mortgage is. how do cash back mortgages work in canada. And actually it comes from old French, mort, implies dead, dead, and the gage, implies promise, I'm, I'm a hundred percent sure I'm mispronouncing it, however it comes from dead pledge.
When 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 pledge or a home mortgage. And probably due to the fact that it originates from old French is the reason why we don't state mort gage. We state, mortgage.
They're actually describing the home loan, home loan, the home loan. And what I desire to carry out in the rest of this video is utilize a little screenshot from a spreadsheet I made to in fact reveal you the mathematics or actually show 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 home mortgage calculator, home loan, or in fact, even better, just go to the download, just go to the downloads, downloads, uh, folder on your web browser, you'll see a bunch of files and it'll be the file called home mortgage calculator, home mortgage calculator, calculator dot XLSX.
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But just go to this URL and after that you'll see all of the files there and then you can just download this file if you wish to play with it. However what it does here is in this sort of dark brown color, these are the presumptions that you could 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 actually saved up, that I 'd spoken about right over there. And then the, uh, loan amount, well, I have the $125,000, I'm going to need to obtain $375,000. It calculates it for us and then I'm going to get a pretty plain vanilla loan.
So, 30 years, it's going to be a 30-year fixed rate home loan, fixed rate, repaired rate, which suggests the rates of interest will not change. We'll speak about that in a little bit. This 5.5 percent that I am paying on my, on the cash that I borrowed will not alter over the course of the thirty years.
Now, this little tax rate that I have here, this is to really find out, what is the tax savings of the interest reduction on my loan? And we'll talk about that in a second, we can neglect it in the meantime. And then these other things that aren't in brown, you shouldn't mess with these if you in fact do open up this spreadsheet yourself - how do cash back mortgages work in canada.
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So, it's literally the yearly rates of interest, 5.5 percent, divided by 12 and most mortgage are compounded on a month-to-month basis. So, at the end of each month they see just how much money you owe and then they will charge you this much interest on that for the month.
It's really a quite fascinating problem. 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 home loan payment is going to be roughly $2,100. Now, right when I purchased your home I wish to introduce a little bit of vocabulary and we have actually spoken about this in some of the other videos.
And we're assuming that it deserves $500,000. We are presuming that it's worth $500,000. That is a property. It's a possession due to the fact that it gives you future advantage, the future advantage of being able to live in it. Now, there's a liability versus that possession, that's the mortgage, 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 debt and if you were basically to sell the properties and settle the debt. how do reverse mortgages work?. If you sell the 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 instantly after doing it then you would have, you would have a $500,000 home, you 'd pay off your $375,000 in debt and you would get in your pocket $125,000, which is precisely what your initial down payment was however this is your equity.
However you could not presume it's constant and have fun with the spreadsheet a little bit. However I, what I would, I'm presenting this since as we pay down the debt this number is going to get smaller sized. So, this number is getting smaller, let's say at some point this is just $300,000, then my equity is going to get larger.
Now, what I've done here is, well, really prior to I get to the chart, let me actually show you how I determine the chart and I do this throughout 30 years and it goes by month. So, so you can envision that there's actually 360 rows here on the actual spreadsheet and you'll see that if you go and open it up.