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What I desire to finish with this video is explain what a home mortgage is however I think the majority of us have a least a general sense of it. However even much better than that actually enter into the numbers and comprehend a little bit of what you are in fact doing when you're paying a home loan, what it's made up of and just how much of it is interest versus how much of it is actually paying for the loan.
Let's say that there is a home that I like, let's say that that is your house that I want to purchase (how do reverse mortgages work). It has a cost of, let's say that I need to pay $500,000 to purchase that home, this is the seller of your home right here.
I would like to buy it. I would like to purchase your home. This is me right here - what is the current interest rate for commercial mortgages?. And I have actually been able to conserve up $125,000. which type of interest is calculated on home mortgages. I have actually had the ability to save up $125,000 but I would actually 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 provide me the rest of the quantity I require for that home, 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 seem like, uh, uh, a great person with a great job who has a good credit rating.
We need to have that title of the house and as soon as you settle the loan we're going to provide you the title of the house. 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.
But the title of the house, the file that states who in fact owns the house, so this is the house title, this is the title of your home, house, 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, possibly they have not settled their mortgage, it will go to the bank that I'm borrowing 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 mortgage is. And really it originates from old French, mort, implies dead, dead, and the gage, indicates promise, I'm, I'm a hundred percent sure I'm mispronouncing it, but it originates from https://sandirk8qf.doodlekit.com/blog/entry/10514127/h1-styleclearboth-idcontentsection0everything-about-which-fico-score-is-used-for-mortgagesh1 dead pledge.
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As soon as I pay off the loan this promise of the title to the bank will die, it'll come back to me. And that's why it's called a dead pledge or a mortgage. And probably due to the fact that it comes from old French is the reason why we do not say mort gage. what is a fixed rate mortgages. We state, home loan.
They're truly describing the home loan, mortgage, the home loan. 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 show you the mathematics siriusxm finance or in fact reveal 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 mortgage calculator, home mortgage, or in fact, even much better, simply 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 loan calculator, calculator dot XLSX.
However just go to this URL and after that you'll see all of the files there and then you can simply download this file if you want to have fun with it. However what it does here is in this kind of dark brown color, these are the assumptions that you might input which you can change these cells in your spreadsheet without breaking the entire spreadsheet.
I'm buying a $500,000 house. It's a 25 percent deposit, so that's the $125,000 that I had saved up, that I 'd discussed right over there. And then the, uh, loan amount, well, I have the $125,000, I'm going to have to obtain $375,000. It computes it for us and after that I'm going to get a quite plain vanilla loan.
So, 30 years, it's going to be a 30-year fixed rate home mortgage, repaired rate, repaired rate, which indicates the rate 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 money that I obtained will not alter throughout the 30 years.
Now, this little tax rate that I have here, this is to in fact find out, what is the tax savings of the interest reduction on my loan? And we'll discuss that in a 2nd, we can ignore it in the meantime. And after that these other things that aren't in brown, you should not tinker these if you actually do open up this spreadsheet yourself.
So, it's actually the yearly rates of interest, 5.5 percent, divided by 12 and most mortgage are intensified on a month-to-month basis. So, at the end of every month they see how much cash you owe and after that they will charge you this much interest on that for the month.
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It's actually a pretty fascinating issue. But for a $500,000 loan, well, a $500,000 house, a $375,000 loan over thirty years at a 5.5 percent rate of interest. My mortgage payment is going to be approximately $2,100. Now, right when I purchased the house I desire to present a bit of vocabulary and we've discussed this in some of the other videos.
And we're assuming that it's worth $500,000. We are assuming that it deserves $500,000. That is an asset. It's a possession due to the fact that it offers you future advantage, the future benefit of having the ability to reside 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 assets and this is all of your financial obligation and if you were essentially to offer the properties and settle the debt. If you sell your home you 'd get the title, you can get the cash and after that you pay it back to the bank.
But if you were to unwind this transaction right away after doing it then you would have, you would have a $500,000 house, you 'd settle your $375,000 in financial obligation and you would get in your pocket $125,000, which is precisely what your initial deposit was however this is your equity.