And we're presuming that it's worth $500,000. We are presuming that it's worth $500,000. That is a possession. It's a possession because it gives you future advantage, the future advantage of having the ability to reside in it. Now, there's a liability against that property, 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 financial obligation and if you were basically to offer the assets and pay off the financial obligation. If you sell the house you 'd get the title, you can get the money and after that you pay it back to the bank.
However if you were to unwind this transaction right away 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 precisely what your initial deposit was however this is your equity.
However you could not assume it's continuous and have fun with the spreadsheet a little bit. However I, what I would, I'm presenting this because as we pay for the debt 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, actually before I get to the chart, let me actually reveal you how I compute the chart and I do this throughout thirty 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 zero, which I do not reveal 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, rather of owing $375,000 at the end of the first month I owe $376,718. Now, I'm a good guy, I'm not going to default on my home loan so I make that very 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 started 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 increased by precisely $410. Now, you're probably stating, hello, gee, I made a $2,000 payment, an approximately a $2,000 payment and my equity only increased by $410,000.
So, that really, in the beginning, your payment, your $2,000 payment is mostly interest. Just $410 of it is principal. However as you, and then you, and then, so as your loan balance goes down 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 new prepayment balance. I pay my home loan again. This is my new loan balance. And notification, currently by month 2, $2.00 more went to principal and $2.00 less went to interest. And over the course of 360 months you're going to see that it's a real, sizable difference.
This is the interest and principal portions of our home loan payment. So, this entire height right here, this is, let me scroll down a little bit, this is by month. So, this whole height, if you notice, this is the exact, this is exactly our home loan payment, this $2,129. Now, on that very 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 down the principal, the actual loan quantity.
Many of it chose the interest of the month. However as I start paying down the loan, as the loan balance gets smaller sized and smaller, each of my payments, there's less interest to pay, let me do a better color than that. There is less interest, let's say if we head out here, https://timesharecancellations.com/ this is month 198, over there, that last month there was less interest so more of my $2,100 really goes to pay off 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 planners or real estate agents tell you, hey, the advantage of purchasing your house is that it, it's, it has tax advantages, and it does.
Your interest, not your whole payment. Your interest is tax deductible, deductible. And I wish to be extremely clear with what deductible ways. So, let's for instance, speak about the interest fees. So, this entire time over thirty years I am paying $2,100 a month or $2,129.29 a month. Now, at the starting a great deal of that is interest.
That $1,700 is tax-deductible. Now, as we go further and further monthly I get a smaller and smaller tax-deductible portion of my actual mortgage payment. Out here the tax deduction is really really small. As I'm preparing to settle my whole home mortgage and get the title of my home.
This does not mean, let's state that, let's say in one year, let's say in one year I paid, I do not know, 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 say 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 say I was paying approximately 35 percent on that $100,000.
Let's state, you understand, if I didn't have this home mortgage I would pay 35 percent taxes which would be about $35,000 in taxes for that year. Simply, this is just a rough price quote. Now, when you say that $10,000 is tax-deductible, the interest is tax-deductible, that does not mean that I can simply take it from the $35,000 that I would have generally owed and only paid $25,000.