And we're presuming 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 advantage, the future advantage of having the ability to live in it. Now, there's a liability against that possession, that's the mortgage loan, that's the $375,000 liability, $375,000 loan or financial obligation.
If this was all of your properties and this is all of your financial obligation and if you were basically to sell the properties 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 relax this deal instantly after doing it then you would have, you would have a $500,000 home, you 'd pay off your $375,000 in financial obligation and you would get in your pocket $125,000, which is exactly what your initial down payment was but this is your equity.
However you might not presume it's consistent and play with the spreadsheet a bit. But I, what I would, I'm introducing this due to the fact that as we pay for the financial obligation this number is going to get smaller sized. So, this number is getting smaller sized, let's state at some point this is only $300,000, then my equity is going to get bigger.
Now, what I've done here is, well, actually prior to I get to the chart, let me really reveal you how I calculate the chart and I do this over the course of 30 years and it passes month. So, so you can think of that there's in fact 360 rows here on the actual spreadsheet and you'll see that if you go and open it up.
So, on month no, which I don't show here, you obtained $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 haven't made any home loan payments yet.
So, now prior to I pay any of my payments, instead of owing $375,000 at the end of the very first month I owe $376,718. Now, I'm a good person, I'm not going to default on my home mortgage so I make that very first home mortgage payment that we computed, that we determined right over here.
Now, this right here, what I, little asterisk here, this is my equity now. So, remember, I started 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 most likely saying, hey, gee, I made a $2,000 payment, an approximately a $2,000 payment and my equity just went up by $410,000.
So, that really, in the start, your payment, your $2,000 payment is mainly interest. Only $410 of it is principal. But as you, and then you, and then, so as your loan balance goes down 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 home loan again. This is my brand-new loan balance. And notice, already by month two, $2.00 more went to primary and $2.00 less went to interest. And over the course of 360 months you're visiting that it's a real, sizable difference.
This is the interest and principal portions of our home mortgage payment. So, this whole height right here, this is, let me scroll down a bit, this is by month. So, this entire height, if you observe, this is the precise, this is precisely our home mortgage payment, this $2,129. Now, on that extremely first month you saw that of my $2,100 only $400 of it, this is the $400, only $400 of it read more went to actually pay for the principal, the actual loan quantity.
Most of it opted for the interest of the month. However as I start paying down the loan, as the loan balance gets smaller and smaller, each of my payments, there's less interest to pay, let me do a better color than that. There is less interest, let's state if we go out here, this is month 198, 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 wish to speak about in this video without making it too long is this idea of a interest tax reduction. So, a great deal of times you'll hear monetary organizers or real estate agents 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 wish to be very clear with what deductible means. So, let's for example, discuss the interest charges. So, this entire time over thirty years I am paying $2,100 a month or $2,129.29 a month. Now, at the starting a great deal of that is interest.
That $1,700 is tax-deductible. Now, as we go further and further every month I get a smaller sized and smaller sized tax-deductible portion of my actual home mortgage payment. Out here the tax reduction is actually very small. As I'm getting all set to settle my entire mortgage and get the title of my house.
This doesn't indicate, let's say that, let's state in one year, let's say in one year I paid, I do not understand, I'm going to make up a number, I didn't calculate it on the spreadsheet. Let's say in year one, year one, I pay, I pay $10,000 in interest, $10,000 in interest.
And, but let's state $10,000 went to interest. To say this deductible, and let's state prior to this, let's state before 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 say I was paying approximately 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. Just, this is just a rough price quote. Now, when you state that $10,000 is tax-deductible, the interest is tax-deductible, that does not imply that I can just take it from the $35,000 that I would have generally owed and only paid $25,000.