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What I wish to do with this video is describe what a home loan is but I believe the majority of us have a least a basic sense of it. But even better than that in fact enter into the numbers and understand a bit of what you are really doing when you're paying a mortgage, what it's made up of and just how much of it is interest versus how much of it is actually paying for the loan.
Let's say that there is a house that I like, let's state that that is your house that I want to acquire (what is the current interest rate for mortgages). It has a cost tag of, let's state that I require to pay $500,000 to buy that home, this is the seller of your home right here.
I want to purchase it. I wish to buy the house. This is me right here - how do mortgages work. And I've been able to save up $125,000. what are subprime mortgages. I've been able to conserve up $125,000 however I would actually like to live in that home so I go to a bank, I go to a bank, get a brand-new color for the bank, so that is the bank right there.
Bank, can you provide me the rest of the quantity I need for that home, 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 states, sure, you look like, uh, uh, a nice guy with a good job who has an excellent credit rating.
We need to have that title of your house and once you pay off the loan we're going to give you the title of your house. 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.
However the title of the house, the document that states who really owns your house, so this is the house title, this is the title of your home, house, home title. It will not go to me. It will go to the bank, the house title will go from the seller, perhaps even the seller's bank, perhaps they have not settled their Great site mortgage, it will go to the bank that I'm borrowing from.
So, this is the security right here. That is technically what a mortgage is. This pledging of the title for, as the, as the security for the loan, that's what a home loan is. And actually it originates from old French, mort, means dead, dead, and the gage, means pledge, I'm, I'm a hundred percent sure I'm mispronouncing it, but it comes from dead pledge.
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When I settle the loan this promise of the title to the bank will pass away, it'll return to me. Which's why it's called a dead promise or a home loan. And most likely because it originates from old French is the reason why we don't say mort gage. how do mortgages work. We state, mortgage.
They're actually referring to the home loan, mortgage, the home loan. And what I wish to carry out in the rest of this video is utilize a little screenshot from a spreadsheet I made to actually reveal you the mathematics or actually reveal 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 really, even much better, just 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 https://www.openlearning.com/u/star-qfkxk6/blog/TopGuidelinesOfWhichTypeOfCreditIsUsuallyUsedForCars/ home loan calculator, home mortgage calculator, calculator dot XLSX.
But just go to this URL and after that you'll see all of the files there and after that you can just download this file if you desire to have fun with it. 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 alter these cells in your spreadsheet without breaking the entire spreadsheet.
I'm purchasing a $500,000 house. It's a 25 percent down payment, so that's the $125,000 that I had actually 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 pretty plain vanilla loan.
So, thirty years, it's going to be a 30-year set rate mortgage, fixed rate, repaired rate, which suggests the rates of interest won't alter. We'll speak about that in a little bit. This 5.5 percent that I am paying on my, on the money that I obtained will not alter throughout the 30 years.
Now, this little tax rate that I have here, this is to actually find out, what is the tax savings of the interest deduction on my loan? And we'll discuss that in a second, we can disregard it for now. And after that these other things that aren't in brown, you should not tinker these if you actually do open up this spreadsheet yourself.
So, it's literally the annual rates of interest, 5.5 percent, divided by 12 and many home mortgage loans are intensified on a monthly basis. So, at the end of on a monthly basis they see just how much cash you owe and after that they will charge you this much interest on that for the month.
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It's actually a quite fascinating problem. But for a $500,000 loan, well, a $500,000 home, a $375,000 loan over 30 years at a 5.5 percent interest rate. My home mortgage payment is going to be approximately $2,100. Now, right when I purchased your house I want to present a little bit of vocabulary and we have actually talked about this in some of the other videos.
And we're assuming that it's worth $500,000. We are assuming that it deserves $500,000. That is a property. It's an asset due to the fact that it provides you future benefit, the future benefit of being able to live in it. Now, there's a liability versus that possession, that's the home 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 debt and if you were essentially to offer the properties and settle the financial obligation. If you sell 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 relax this deal immediately 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 original deposit was however this is your equity.