And we're presuming that it deserves $500,000. We are assuming that it deserves $500,000. That is a property. It's a possession since it gives you future advantage, the future advantage of being able to live in it. Now, there's a liability versus that property, that's the mortgage loan, that's the $375,000 liability, $375,000 loan or debt.
If this was all of your properties and this is all of your financial obligation and if you were essentially to offer the possessions and settle the financial obligation. If you offer your home you 'd get the title, you can get the cash and then 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 debt and you would get in your pocket $125,000, which is precisely what your initial down payment was however this is your equity.
But you could not presume it's constant and have fun with the spreadsheet a 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, let's state at some point this is just $300,000, then my equity is going to get bigger.
Now, what I've done here is, well, really prior to I get to the chart, let me really 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 envision that there's really 360 rows here on the actual spreadsheet and you'll see that if you go and open it up.
So, on month absolutely no, which I do not reveal here, you borrowed $375,000. Now, over the course of that month they're going to charge you 0.46 percent interest, keep in mind 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 before I pay any of my payments, rather of owing $375,000 at the end of the first month I owe $376,718. Now, I'm a hero, I'm not going to default on my home mortgage so I make that very first 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, keep in mind, I started with $125,000 of equity. After paying one loan balance, after, after my very first payment I now have $125,410 in equity. So, my equity has actually gone up by exactly $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 increased by $410,000.
So, that extremely, in the start, your payment, your $2,000 payment is mainly interest. Just $410 of it is principal. However as you, and after that 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 new prepayment balance. I pay my mortgage once again. This is my brand-new loan balance. And notification, already by month two, $2.00 more went to primary and $2.00 less went to interest. And throughout 360 months you're visiting that it's a real, substantial difference.
This is the interest and primary parts of our home loan payment. So, this entire height right here, this is, let me scroll down a little bit, this is by month. So, this entire height, if you discover, this is the exact, this is precisely our home loan payment, this $2,129. Now, on that very first month you saw that of my $2,100 just $400 of it, this is the $400, just $400 of it went to actually pay down the principal, the actual loan quantity.
The majority of it chose the interest of the month. But as I begin paying for 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 better color than that. There is less interest, let's say if we go 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 wish to discuss in this video without making it too long is this concept of a interest tax reduction. So, a great deal of times you'll hear monetary planners or realtors tell you, hey, the advantage of purchasing your house is that it, it's, it has tax advantages, and it does.
Your interest, not your entire payment. Your interest is tax deductible, deductible. And I desire to be really clear with what deductible ways. So, let's for circumstances, talk about the interest fees. So, this whole time over thirty years I am paying $2,100 a month or $2,129.29 a month. Now, at the starting here 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 and smaller sized tax-deductible portion of my real mortgage payment. Out here the tax deduction is really very small. As I'm preparing yourself to pay off my whole home mortgage and get the title of my home.
This does not imply, let's state that, let's say in one year, let's say in one year I paid, I don't know, I'm going to comprise a number, I didn't compute 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 say this deductible, and let's state before this, let's say prior to this I was making $100,000. Let's put the loan aside, let's say I was making $100,000 a year and let's say I was paying approximately 35 percent on that $100,000.
Let's state, you understand, if I didn't have this home loan I would pay 35 percent taxes which would be about $35,000 in taxes for that year. Simply, this is just a rough price quote. Now, when you say that $10,000 is tax-deductible, the interest is tax-deductible, that does not mean that I can simply take it from the $35,000 that I would have generally owed and just paid $25,000.