Let's state that there is a house that I like, let's say that that is the home that I wish to acquire. It has a cost of, let's say that I require to pay $500,000 to purchase that home, this is the seller of your house right here.
I wish to buy it. I would like to purchase the house. This is me right here. And I've had the ability to save up $125,000. I've been able to conserve up $125,000 however I would really like to reside in that home 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 lend me the rest 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 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 states, sure, you seem like, uh, uh, a good man with a great task who has a great credit ranking.
We have to have that title of your home and when you settle the loan we're going to provide 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 your house, the file that says who actually owns your house, so this is the house title, this is the title of your house, house, 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, possibly they haven't paid off 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 mortgage is. This pledging of the title for, as the, as the security for the loan, that's what a home mortgage is. buy to let mortgages how do they work. And really it comes from old French, mort, implies dead, dead, and the gage, indicates pledge, I'm, I'm a hundred percent sure I'm mispronouncing it, however it originates from dead promise.
When I pay off the loan this pledge of the title to the bank will die, it'll come back to me. Which's why it's called a dead promise or a home loan. And most likely because it originates from old French is the reason that we don't state mort gage. We state, mortgage.
They're actually describing the home mortgage, home mortgage, the home loan. And what I want to carry out in the rest of this video is utilize a little screenshot from a spreadsheet I made to in fact show you the math or really 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 home mortgage calculator, mortgage, Go to this site or really, 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 bunch of files and https://www.bizjournals.com/nashville/news/2020/04/13/nbj-reveals-the-2020-best-places-to-work-honorees.html it'll be the file called home mortgage calculator, home loan calculator, calculator dot XLSX.
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But simply go to this URL and after that you'll see all of the files there and after that you can simply 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 might input which 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 down payment, so that's the $125,000 that I had actually saved up, that I 'd discussed right over there. And then the, uh, loan quantity, well, I have the $125,000, I'm going to have to obtain $375,000. It calculates it for us and after that I'm going to get a quite plain vanilla loan.
So, thirty years, it's going to be a 30-year set rate home loan, repaired rate, fixed rate, which means the interest rate 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 borrowed will not change throughout the 30 years.
Now, this little tax rate that I have here, this is to really figure out, what is the tax savings of the interest reduction on my loan? And we'll talk about that in a second, we can neglect it for now. And then these other things that aren't in brown, you shouldn't tinker these if you actually do open up this spreadsheet yourself - reverse mortgages how they work.
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So, it's literally the yearly rates of interest, 5.5 percent, divided by 12 and a lot of home loan are compounded on a month-to-month basis. So, at the end of monthly they see just how much money you owe and then they will charge you this much interest on that for the month.
It's actually a quite fascinating problem. But for a $500,000 loan, well, a $500,000 home, a $375,000 loan over thirty years at a 5.5 percent rates of interest. My mortgage payment is going to be roughly $2,100. Now, right when I purchased your home I desire to introduce a bit of vocabulary and we've talked about this in some of the other videos.
And we're assuming that it deserves $500,000. We are assuming that it's worth $500,000. That is an asset. It's a possession because it gives you future advantage, the future advantage of being able 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 sell the possessions and settle the debt. how do variable mortgages work in canada. 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.
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However if you were to relax 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 debt and you would get in your pocket $125,000, which is exactly what your original deposit was however this is your equity.
However you might not presume it's constant and play with the spreadsheet a little bit. But I, what I would, I'm introducing this because as we pay down the debt this number is going to get smaller. So, this number is getting smaller sized, let's state eventually this is just $300,000, then my equity is going to get larger.
Now, what I have actually done here is, well, actually before I get to the chart, let me actually show you how I compute the chart and I do this over the course of 30 years and it passes month. So, so you can envision that there's actually 360 rows here on the real spreadsheet and you'll see that if you go and open it up.