Let's say that there is a house that I like, let's say that that is your house that I wish to purchase. It has a price of, let's state that I require to pay $500,000 to purchase that house, this is the seller of your home right here.
I wish to purchase it. I want to buy your home. This is me right here. And I've had the ability to save up $125,000. I've had the ability to save up $125,000 but I would really like to reside in that home 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 quantity I require for that house, 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 appear like, uh, uh, a nice man with a good job who has a great credit ranking.
We have to have that title of your house and as soon as you settle the loan we're going to provide you the title of your home. So what's going to happen 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 document that says who really owns your home, so this is the home title, this is the title of your home, house, 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 haven't settled 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 home mortgage is. This pledging of the title for, as the, as the security for the loan, that's what a home loan is. how do reverse mortgages work after death. And actually it originates from old French, mort, means dead, dead, and the gage, means promise, I'm, I'm a hundred percent sure I'm mispronouncing it, however it comes from dead promise.
As soon as https://www.bloomberg.com/press-releases/2019-08-06/wesley-financial-group-provides-nearly-6-million-in-timeshare-debt-relief-in-july I settle 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 promise or a mortgage. And most likely due to the https://www.bizjournals.com/nashville/news/2020/04/13/nbj-reveals-the-2020-best-places-to-work-honorees.html fact that it comes from old French is the factor why we do not say mort gage. We say, home mortgage.
They're really describing the home mortgage, home loan, the 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 in fact 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 home mortgage calculator, mortgage, or actually, even much better, just 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 mortgage calculator, mortgage calculator, calculator dot XLSX.
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However just go to this URL and then you'll see all of the files there and then you can simply 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 change these cells in your spreadsheet without breaking the whole spreadsheet.
I'm buying a $500,000 home. 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 need to obtain $375,000. It determines 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 indicates the rate of interest will not alter. We'll talk about that in a little bit. This 5.5 percent that I am paying on my, on the cash that I borrowed will not change throughout the 30 years.
Now, this little tax rate that I have here, this is to really find out, what is the tax cost 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 shouldn't 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 rates of interest, 5.5 percent, divided by 12 and the majority of mortgage are compounded on a month-to-month basis. So, at the end of every month they see how much cash you owe and then they will charge you this much interest on that for the month.
It's in fact a pretty intriguing problem. However for a $500,000 loan, well, a $500,000 house, a $375,000 loan over 30 years at a 5.5 percent rate of interest. My mortgage payment is going to be approximately $2,100. Now, right when I purchased your house 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's worth $500,000. We are assuming that it deserves $500,000. That is an asset. It's a property because it provides you future advantage, the future benefit of being able to live in it. Now, there's a liability versus 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 essentially to sell the assets and pay off the financial obligation. how to reverse mortgages work. 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.
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However if you were to unwind this deal immediately 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 original down payment was but this is your equity.
But you could not presume it's continuous and play with the spreadsheet a bit. But I, what I would, I'm introducing this since as we pay for the debt this number is going to get smaller sized. So, this number is getting smaller sized, let's say at some point this is only $300,000, then my equity is going to get bigger.
Now, what I have actually done here is, well, really before I get to the chart, let me actually reveal you how I compute the chart and I do this over the course of 30 years and it goes by month. So, so you can imagine that there's in fact 360 rows here on the real spreadsheet and you'll see that if you go and open it up.