Bank, can you provide me the rest of the quantity I require for that home, which is essentially $375,000 (obtaining a home loan and how mortgages work). 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 says, sure, you look like, uh, uh, a good man with a great job who has a good credit score.
We have to have that title of your home and as soon as you pay off the loan we're going to give you the title of your home. So what's going to take place here is we're going to have the loan is going to go to me, so it's $375,000, $375,000 loan - reverse mortgages how they work.
However the title of your home, the document that says who in fact owns the home, so this is the home title, this is the title of your home, home, house title. It will not go to me. It will go to the bank, the home title will go from the seller, possibly even the seller's bank, perhaps they haven't settled their home loan, it will go to the bank that I'm borrowing from.
So, this is the security right here. That is technically what a home loan is. This promising of the title for, as the, as the security for the loan, that's what a home mortgage is. And in fact it comes from old French, mort, implies dead, dead, and the gage, suggests promise, I'm, I'm a hundred percent sure I'm mispronouncing it, however it comes from dead pledge.
As soon as I settle the loan this pledge of the title to the bank will die, it'll return to me. Which's why it's called a dead pledge or a home mortgage. And most likely because it originates from old French http://knoxxmws426.tearosediner.net/h1-style-clear-both-id-content-section-0-the-9-minute-rule-for-how-does-chapter-13-work-with-mortgages-h1 is the reason that we don't say mort gage. We say, home mortgage.
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They're really referring to the mortgage, mortgage, the mortgage. And what I wish to carry out in the rest of this video is use a little screenshot from a spreadsheet I made to really reveal you the math or actually reveal 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, or really, even better, just go to the download, simply go to the downloads, downloads, uh, folder on your web browser, you'll see a bunch of files and it'll be the file called home loan calculator, mortgage calculator, calculator dot XLSX.
However simply go to this URL and lauren jenifer gates after that you'll see all of the files there and after that you can just download this file if you want to have fun with it. how reverse mortgages work. However what it does here remains in this sort of dark brown color, these are the assumptions that you might input and that you can change these cells in your spreadsheet without breaking the entire spreadsheet.
I'm purchasing a $500,000 house. It's a 25 percent deposit, so that's the $125,000 that I had saved up, that I 'd discussed right over there. And after that the, uh, loan amount, well, I have the $125,000, I'm going to need to borrow $375,000. It calculates it for us and after that I'm going to get a quite plain vanilla loan.
So, 30 years, it's going to be a 30-year fixed rate mortgage, fixed rate, fixed rate, which suggests the rate of interest won't change. We'll discuss that in a bit. This 5.5 percent that I am paying on my, on the cash that I borrowed will not change throughout the thirty years.
Now, this little tax rate that I have here, this is to actually determine, what is the tax savings of the interest reduction on my loan? And we'll speak about that in a 2nd, we can neglect it for now. how reverse mortgages work. And then these other things that aren't in brown, you shouldn't mess with these if you in fact do open up this spreadsheet yourself.
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So, it's literally the annual rates of interest, 5.5 percent, divided by 12 and most home loan are compounded on a month-to-month basis. So, at the end of monthly they see just how much cash you owe and then they will charge you this much interest on that for the month.
It's in fact a quite interesting problem. However for a $500,000 loan, well, a $500,000 home, a $375,000 loan over thirty years at a 5.5 percent rate of interest. My home loan payment is going to be roughly $2,100. Now, right when I purchased the home I wish to introduce a little bit of vocabulary and we've talked about this in a few of the other videos.
And we're presuming that it deserves $500,000. We are assuming that it's worth $500,000. That is a property. It's a possession because it gives you future advantage, the future benefit 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 debt.
If this was all of your possessions and this is all of your financial obligation and if you were basically to sell the possessions and pay off the debt. If you offer your house you 'd get the title, you can get the cash and then you pay it back to the bank.
However if you were to unwind this deal immediately after doing it then you would have, you would have a $500,000 house, you 'd pay off your $375,000 in debt and you would get in your pocket $125,000, which is precisely what your original down payment was but this is your equity.
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However you might not presume it's constant and play with the spreadsheet a bit. However I, what I would, I'm introducing this due to the fact that as we pay for the debt this number is going to get smaller. So, this number is getting smaller sized, 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 in fact show you how I determine the chart and I do this throughout 30 years and it passes month. So, so you can think of that there's really 360 rows here on the real spreadsheet and you'll see that if you go and open it up.
So, on month absolutely 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 have not 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 hero, I'm not going to default on my home loan so I make that first mortgage payment that we determined, that we calculated right over here (how do down payments work on mortgages).