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 property because it provides you future benefit, the future advantage of having the ability to live in it. Now, there's a liability versus that possession, that's the home loan, 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 pay off the debt. If you sell the house 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 instantly 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 down payment was but this is your equity.
But you might not presume it's constant and play with the spreadsheet a bit. But I, what I would, I'm introducing this because as we pay for the debt this number is going to get smaller. So, this number is getting smaller, let's say at some point this is only $300,000, then my equity is going to get bigger.
Now, what I have actually done here is, well, actually https://timesharecancellations.com/a-guide-to-timeshare-cancellation-are-timeshares-too-good-to-be-true/ prior to I get to the chart, let me in fact show you how I calculate the chart and I do this over the course of thirty years and it goes by month. So, so you can imagine 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 zero, 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 mortgage 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 hero, I'm not going to default on my home mortgage so I make that very first home mortgage payment that we calculated, that we computed 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 very first payment I now have $125,410 in equity. So, my equity has gone up by exactly $410. Now, you're probably saying, hello, gee, I made a $2,000 payment, an approximately a $2,000 payment and my equity only went up by $410,000.
So, that really, in the start, your payment, your $2,000 payment is primarily interest. Just $410 of it is primary. However as you, and then you, and after that, 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 mortgage once again. This is my new loan balance. And notice, currently by month two, $2.00 more went to principal and $2.00 less went to interest. And throughout 360 months you're going to see that it's a real, substantial distinction.
This is the interest and principal portions of our home loan payment. So, this entire height right here, this is, let me scroll down a bit, this is by month. So, this entire height, if you see, this is the exact, this is precisely our home loan payment, this $2,129. Now, on that really first month you saw that of my $2,100 just $400 of it, this is the $400, just $400 of it went to really pay down the principal, the actual loan amount.
Many of it opted for the interest of the month. However as I start paying for 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, over there, that last month there was less interest so more of my $2,100 in fact goes to pay off the loan.
Now, the last thing I wish to speak about in this video without making it too long is this concept of a interest tax reduction. So, a lot of times you'll hear monetary planners or real estate agents tell you, hey, the advantage of buying your home is that it, it's, it has tax benefits, and it does.
Your interest, not your whole payment. Your interest is tax deductible, deductible. And I desire to be very clear with what deductible means. So, let's for example, discuss 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 beginning a lot of that is interest.
That $1,700 is tax-deductible. Now, as we go even more and even more monthly I get a smaller sized and smaller sized tax-deductible part of my actual mortgage payment. Out here the tax deduction is in fact really small. As I'm getting all set to pay off my entire home loan and get the title of my house.
This doesn't mean, let's say that, let's say in one year, let's say in one year I paid, I don't understand, I'm going to make up 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, but let's say $10,000 went to interest. To state this deductible, and let's state before this, let's say before 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 state I was paying approximately 35 percent on that $100,000.
Let's state, you know, 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 just 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 simply take it from the $35,000 that I would have normally owed and just paid $25,000.