Let's state that there is a home that I like, let's say that that is the house that I wish to acquire. It has a rate tag of, let's say that I require to pay $500,000 to purchase that home, this is the seller of the house right here.
I would like to buy it. I want to purchase the home. This is me right here. And I've been able to save up $125,000. I have actually been able 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 amount I need for that house, which is basically $375,000. I'm putting 25 percent down, this right, this right, this number right here, that is sirius billing phone number 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 great man with an excellent task who has an excellent credit rating.
We need to have that title of your house and once you pay off the loan we're going to offer you the title of your house. 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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However the title of the house, the file that says who actually owns the home, so this is the home title, this is the title of your house, home, house 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, maybe they have not paid off their home mortgage, https://www.businesswire.com/news/home/20200115005652/en/Wesley-Financial-Group-Founder-Issues-New-Year%E2%80%99s it will go to the bank that I'm obtaining from.
So, this is the security right here. That is technically what a home loan is. This promising of the title for, as the, as the security for the loan, that's what a home loan is. how do points work in mortgages. And actually it originates from old French, mort, suggests dead, dead, and the gage, means pledge, I'm, I'm a hundred percent sure I'm mispronouncing it, however it originates from dead pledge.
When I settle the loan this promise of the title to the bank will die, it'll return to me. And that's why it's called a dead promise or a mortgage. And probably since it comes from old French is the factor why we do not state mort gage. We say, mortgage.
They're truly referring to the mortgage, mortgage, the home mortgage loan. And what I wish to perform in the rest of this video is use a little screenshot from a spreadsheet I made to actually show you the math or in fact show you what your home loan 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 actually, even much better, simply go to the download, simply 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 loan calculator, calculator dot XLSX.
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But just 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 wish to have fun with it. But what it does here remains in this sort of dark brown color, these are the presumptions that you could input and that you can change these cells in your spreadsheet without breaking the entire spreadsheet.
I'm purchasing a $500,000 home. It's a 25 percent deposit, so that's the $125,000 that I had conserved up, that I 'd discussed right over there. And after that the, uh, loan quantity, well, I have the $125,000, I'm going to need to borrow $375,000. It calculates it for us and then I'm going to get a quite plain vanilla loan.
So, 30 years, it's going to be a 30-year fixed rate mortgage, repaired rate, fixed rate, which implies the interest rate won't change. We'll discuss that in a little bit. This 5.5 percent that I am paying on my, on the money that I obtained will not alter throughout the thirty years.
Now, this little tax rate that I have here, this is to really determine, what is the tax savings of the interest reduction on my loan? And we'll speak about that in a second, we can ignore it for now. And after that these other things that aren't in brown, you should not tinker these if you actually do open this spreadsheet yourself - how do adjustable rate mortgages work.
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So, it's actually the annual interest rate, 5.5 percent, divided by 12 and the majority of mortgage are compounded on a monthly basis. So, at the end of every month 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 problem. However for a $500,000 loan, well, a $500,000 home, 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 bought your home I wish to introduce a bit of vocabulary and we've spoken about this in some 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 a possession since it offers you future advantage, the future benefit of being able to reside in it. Now, there's a liability versus that property, that's the home loan, that's the $375,000 liability, $375,000 loan or debt.
If this was all of your assets and this is all of your debt and if you were basically to sell the assets and settle the financial obligation. how do buy to rent mortgages work. If you sell your house 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 unwind this transaction instantly 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 exactly what your initial down payment was however this is your equity.
However you might not presume it's continuous and play with the spreadsheet a bit. However I, what I would, I'm presenting this since as we pay down 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've done here is, well, actually prior to I get to the chart, let me really reveal you how I compute the chart and I do this throughout 30 years and it goes by month. So, so you can envision that there's really 360 rows here on the actual spreadsheet and you'll see that if you go and open it up.