And we're assuming that it's worth $500,000. We are presuming that it's worth $500,000. That is an asset. It's a possession since it gives you future benefit, the future advantage of being able to live in it. Now, there's a liability versus that possession, 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 possessions and settle the debt. If you offer your home you 'd get the title, you can get the money 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 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 but this is your equity.
But you could not assume it's constant and play with the spreadsheet a little bit. However I, what I would, I'm presenting this because as we pay down the debt this number is going to get smaller. So, this number is getting smaller, let's say at some time this is only $300,000, then my equity is going to get larger.
Now, what I've done here is, well, really 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 passes month. So, so you can envision that there's in fact 360 rows here on the real spreadsheet and you'll see that if you go and open it up.
So, on month no, which I don't reveal here, you borrowed $375,000. Now, over the course of that month they're going to charge you 0.46 percent interest, remember 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 home mortgage payments yet.
So, now before I pay any of my payments, instead 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 mortgage so I make that very first home loan 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, keep in mind, I began with $125,000 of equity. After paying one loan balance, after, after my first payment I now have $125,410 in equity. So, my equity has gone up by precisely $410. Now, you're probably stating, hello, gee, I made a $2,000 payment, a roughly a $2,000 payment and my equity only went up by $410,000.
So, that very, in the beginning, your payment, your $2,000 payment is primarily interest. Only $410 of it is primary. But as you, and after that you, and then, so as your loan balance decreases 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 brand-new prepayment balance. I pay my mortgage again. This is my brand-new loan balance. And notice, currently by month 2, $2.00 more went to primary and $2.00 less went to interest. And throughout 360 months you're visiting that it's an actual, substantial difference.
This is the interest and primary parts of our home loan payment. So, this whole height right here, this is, let me scroll down a little bit, this is by month. So, this entire height, if you observe, this is the exact, this is exactly our mortgage payment, this $2,129. Now, on that really first month you saw that of my $2,100 only $400 of it, this is the $400, only $400 of it went to really pay for the principal, the actual loan more info quantity.
Many of it went for the interest of the month. However as I begin paying down the loan, as the loan balance gets smaller sized and smaller sized, each of my payments, there's less interest to pay, let me do a much better color than that. There is less interest, let's say if we head out here, this is month 198, over there, that last month there was less interest so more of my $2,100 really goes to settle the loan.
Now, the last thing I desire to talk about in this video without making it too long is this idea of a interest tax reduction. So, a lot of times you'll hear financial planners or realtors tell you, hey, the benefit of buying your home is that it, it's, it has tax benefits, and it does.
Your interest, not your entire payment. Your interest is tax deductible, deductible. And I desire to be very clear with what deductible means. So, let's for example, speak about the interest charges. So, this whole time over thirty years I am paying $2,100 a month or $2,129.29 a month. Now, at the beginning a great deal of that is interest.
That $1,700 is tax-deductible. Now, as we go further and even more monthly I get a smaller sized and smaller tax-deductible part of my actual home mortgage payment. Out here the tax reduction is in fact very small. As I'm preparing yourself to pay off my entire mortgage and get the title of my home.
This does not imply, let's say that, let's say in one year, let's state in one year I paid, I don't understand, I'm going to comprise a number, I didn't determine 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, however let's state $10,000 went to interest. To state this deductible, and let's say prior to this, let's state prior to this I was making $100,000. Let's put the loan aside, let's state I was making $100,000 a year and let's state I was paying roughly 35 percent on that $100,000.
Let's say, you understand, if I didn't have this home loan I would pay 35 percent taxes which would have to do with $35,000 in taxes for that year. Simply, this is simply a rough estimate. Now, when you state that $10,000 is tax-deductible, the interest is tax-deductible, that does not mean that I can just take it from the $35,000 that I would have usually owed and just paid $25,000.