Let's state that there is a house that I like, let's state that that is the home that I would like to purchase. It has a cost of, let's say that I require to pay $500,000 to purchase that house, this is the seller of the house right here.
I would like to buy it. I would like to buy the home. This is me right here. And I have actually had the ability to conserve up $125,000. I've been able to conserve 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 provide me the rest of the amount I need for that house, 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 person with an excellent job who has a great credit rating.
We need to have that title of the house and once you pay off the loan we're going to offer you the title of your home. 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 your house, the file that states who in fact owns your home, so this is the home title, this is the title of your house, home, home 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 settled their home mortgage, it will go to the bank that I'm borrowing from.
So, this is the security right here. That is technically what a mortgage is. This promising 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, means pledge, I'm, I'm a hundred percent sure I'm mispronouncing it, however it originates from dead pledge.
Once I pay off 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 pledge or a home loan. And most likely due to the fact that it originates from old French is the reason we don't say mort gage. We state, mortgage.
They're actually describing the home mortgage, home loan, the mortgage. And what I wish to carry out 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 show 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 mortgage calculator, mortgage, or in fact, even better, just go to the download, just 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 mortgage calculator, mortgage calculator, calculator dot XLSX.
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But simply go to this URL Have a peek here and then you'll see all of the files there and then you can just download this file if you wish to play with it. But what it does here remains in this sort of dark brown color, these are the assumptions that you could input and that you can change these cells in your spreadsheet without breaking the whole spreadsheet.
I'm purchasing a $500,000 home. It's a 25 percent down payment, so that's the $125,000 that I had actually conserved up, that I 'd spoken about right over there. And after that the, uh, loan amount, well, I have the $125,000, I'm going to need to borrow $375,000. It computes 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 fixed rate home loan, repaired rate, repaired rate, which means the rate of interest 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 borrowed will not alter throughout the thirty 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 discuss that in a second, we can neglect it for now. And then these other things that aren't in brown, you shouldn't mess with these if you in fact do open this spreadsheet yourself - explain how mortgages work.
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So, it's actually the yearly interest rate, 5.5 percent, divided by 12 and the majority of mortgage are compounded on a monthly basis. So, at the end of on a monthly basis they see how much money you owe and then they will charge you this much interest on that for the month.
It's really a quite interesting issue. But for a $500,000 loan, well, a $500,000 home, a $375,000 loan over 30 years at a 5.5 percent interest rate. My home mortgage payment is going to be roughly $2,100. Now, right when I purchased your home I desire to introduce a little bit of vocabulary and we've 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 possession. It's an asset since it provides you future benefit, the future advantage of having the ability to live in it. Now, there's a liability versus how to rent out my timeshare that property, that's the home 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 debt and if you were basically to sell the properties and pay off the financial obligation. how do reverse 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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But if you were to unwind this deal immediately after doing it then you would have, you would have a $500,000 home, you 'd settle your $375,000 in financial obligation and you would get in your pocket $125,000, which is precisely what your original down payment was but this is your equity.
But you might not assume it's continuous and play with the spreadsheet a bit. However I, what I would, I'm introducing this due to the fact that as we pay down the financial obligation this number is going to get smaller. So, this number is getting smaller sized, let's say eventually this is only $300,000, then my equity is going to get larger.
Now, what I have actually done here is, well, in fact before I get to the chart, let me really reveal you how I calculate the chart and I do this over the course of thirty 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.