Let's state that there is a home that I like, let's state that that is your home that I want to acquire. It has a price of, let's say that I need to pay $500,000 to buy that house, this is the seller of the house right here.
I want to purchase it. I wish to purchase your house. This is me right here. And I've had the ability to conserve up $125,000. I've had the ability to conserve up $125,000 but I would really like to reside in that house so I go to a bank, I go to a bank, get a new color for the bank, so that is the bank right there.
Bank, can you lend me the remainder of the quantity I need for that house, which is essentially $375,000. 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 appear like, uh, uh, a good man with a great job who has a great credit rating.
We need to have that title of your home and when you settle the loan we're going to give you the title https://www.inhersight.com/companies/best/reviews/salary?_n=112289587 of your home. So what's going to occur here is we're going to have the loan is going to go to me, so it's $375,000, $375,000 loan.
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However the title of your home, the file that states who actually owns your home, so this is the house title, this is the title of your house, home, house title. It will not go to me. It will go to the bank, the home title will go from the seller, perhaps even the seller's bank, perhaps they have not settled their home mortgage, it will go to the bank that I'm obtaining from.
So, this is the security right here. That is technically what a mortgage is. This vowing of the title for, as the, as the security for the loan, that's what a mortgage is. how do mortgages work in canada. And in fact it comes from old French, mort, implies dead, dead, and the gage, implies promise, I'm, I'm a hundred percent sure I'm mispronouncing it, but it comes from dead pledge.
As soon as I pay off the loan this pledge of the title to the bank will pass away, it'll come back to me. And that's why it's called a dead pledge or a home loan. And most likely due to the fact that it originates from old French is the reason that we do not state mort gage. We state, home loan.
They're actually describing the home mortgage, home mortgage, the mortgage. And what I want to perform in the rest of this video is use a little screenshot from a spreadsheet I made to actually show you the mathematics or actually show you what your home mortgage payment is going to. And you can download, you can download this spreadsheet at Khan Academy, khanacademy.org/downloads, downloads, slash mortgage calculator, mortgage, or actually, even much better, simply go to the download, just go to the downloads, downloads, uh, folder on your web browser, you'll see a lot of files and it'll be the file called mortgage calculator, home mortgage calculator, calculator dot XLSX.
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However simply go to this URL and then you'll see all of the files there and then you can simply download this file if you wish to play with it. But what it does here remains in this sort of dark brown color, these are the presumptions that you might input which you can alter these cells in your spreadsheet without breaking the entire spreadsheet.
I'm purchasing a $500,000 home. It's a 25 percent down payment, so that's the $125,000 that I had conserved up, that I 'd discussed right over there. And then the, uh, loan amount, well, I have the $125,000, I'm going to have to borrow $375,000. It determines it for us and then I'm going to get a pretty plain vanilla loan.
So, thirty years, it's going to be a 30-year fixed rate home mortgage, fixed rate, fixed rate, which means the interest rate won't alter. We'll speak about that in a little bit. This 5.5 percent that I am paying on my, on the cash that I obtained will not alter over the course of the 30 years.
Now, this little tax rate that I have here, this is to actually determine, what is the tax savings of the interest deduction on my loan? And we'll speak about that in a second, we can ignore it for now. And then these other things that aren't in brown, you shouldn't tinker these if renting my timeshare week you in fact do open up this spreadsheet yourself - how to reverse mortgages work.
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So, it's literally the yearly rate of interest, 5.5 percent, divided by 12 and many mortgage are intensified on a monthly basis. So, at the end of on a monthly basis they see how much money you owe and then they will charge you this much interest on that for the month.
It's really a quite fascinating issue. However for a $500,000 loan, well, a $500,000 house, a $375,000 loan over thirty years at a 5.5 percent rates of interest. My home mortgage payment is going to be approximately $2,100. Now, right when I bought your home I wish to introduce a little bit of vocabulary and we have actually talked about this in a few of the other videos.
And we're assuming that it's worth $500,000. We are assuming that it's worth $500,000. That is an asset. It's an asset because it provides you future advantage, the future advantage of being able 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 properties and this is all of your financial obligation and if you were essentially to offer the possessions and settle the debt. how do reverse mortgages work. If you offer your home you 'd get the title, you can get the cash and then you pay it back to the bank.
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However if you were to unwind this deal instantly 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 initial down payment was however this is your equity.
However you might not assume it's continuous and have fun with the spreadsheet a bit. However I, what I would, I'm presenting this because as we pay down the debt this number is going to get smaller sized. So, this number is getting smaller, let's say eventually this is only $300,000, then my equity is going to get larger.
Now, what I have actually done here is, well, in fact before I get to the chart, let me really reveal you how I determine the chart and I do this over the course of thirty years and it passes month. So, so you can envision that there's actually 360 rows here on the real spreadsheet and you'll see that if you go and open it up.