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What does a mortgage loan do?
My intention with this tape is to tell what a mortgage is, but I think that most of us at least have a general impression of it. However, even better than that, really go into the numbers and somewhat understand what you are really doing when you pay a mortgage, what it is made of and how much of it is interest against how much of it actually pays down the credit.
Let's say there's a home I like, let's say it's the home I want to buy. There has a sign of, let's say I have to pay $500,000 to buy this home, this is the vendor of the home right here.
They have a moustache, that's the salesman of the place. I' d like to buy the place. I' ve been able to store up $125,000, but I really want to be living in this home, so I go to a bench, I go to a bench, get a new paint for the bench for the bench to be right there.
I say, Mr. Banks, you can borrow me the remainder of the amount I need for this place, which is basically $375,000. I lay down 25 per cent, this right, this right, this right, this number here, this is 25 per cent of 500,000 dollars. So I ask the bench, can I have a credit for the change?
Could I have a $375,000 mortgage? with a good gig and a good record. I' ll give you the money, but while you're repaying the money, you can't have the name of this town.
and as soon as you repay the credit, we'll give you the property. So, what's going to go down here is that we're going to give the loans to me, so it's a $375,000, $375,000 mortgage.
Than I can go and buy the home so I will give the totals of $500,000, $500,000, $500,000 to the vendor of the home and I will really move into the home itself and assume that I will use it for my own home. However, the name of the home, the name of the place, the record of who actually has it, so this is the home name, this is the name of the home, the home, the house, the home, the home.
It' goes to the house credit goes from the vendor, maybe even from the vendor's house credit, maybe they didn't get their mortgage, it goes to the house credit to me. I say to save a credit, I say, look, I have to give something to the creditor in case I did not repay the credit or if I simply vanish.
That' s what a mortgage is from a technical point of view. These pledges of security interest for, as that, as the collateral for the debt, that is what a mortgage is for. Actually, it comes from old French, death, means death, means death, and the doctrine, means pawn, I'm, I'm, I'm one hundred per cent sure I'm pronouncing it wrong, but it comes from the death pawn.
Because I promise now, but that promise will end sometime after I disburse the loans. As soon as I have repaid the credit, this pawn of the property will go to the bench, it will come back to me. That'?s why they call it a promise or a mortgage. We' ll say mortgage.
Anyway, this is a little technically, but usually when folks talk about a mortgage, they really talk about the credit itself. They really relate to the mortgage, mortgage, the mortgage loans. What I'd like to do in the remainder of this videos is a small screenshots of a spread sheet I made to actually show you the mathematics or show you what your mortgage will do.
So you can go and get this table at the Khan Academy, where you can get the Khan academy. org/downloads, you can get this table at the Khan Academy, Khan Academy. org/downloads, you can get this table at the Khan Academy. org/downloads, get this table at the Khan Academy, org/downloads, get this table at the Khan Academy. org/downloads, get this table at the Khan Academy. org/downloads, downloads, get this table at the Khan Academy. org/downloads, or actually, better yet, just go to the downloading, just go to the downloading, uh, downloads, folders on your webrowser, you will see a lot of data and it will be named the mortgage computer, mortgage computer, pocket calculator dot XLSX.
So here I would accept the interest rates of 5. 5 per cent. I' m gonna buy a $500,000 house. It' s a deposit of 25 per cent, so that's the $125,000 I was saving that I was talking about right over there. Then the, uh, credit amount, well, I got the $125,000, I'm gonna have to lend me $375,000.
It' it charges for us, and then I'm gonna get a fairly simple custard loan. No. These are going to be a 30 year, so if I say denomination over the years, this is how long the Loan is for. Thus, 30 years, it will be a 30-year fixed-rate mortgage, which means that the interest rates will not be changed, flat interest rates, flat interest rates.
The 5. 5 per cent I am going to spend for mine, for the amount of cash I have lent, will not be changed over the next 30 years. We' ll see that the amount I lent changes when I make part of the payment. Well, this little amount of income that I have here is actually supposed to find out what the interest deductions are?
So it is literaly the plant curiosity charge, 5. 5 proportion, common fraction by 12 and most security interest debt are put unneurotic on a series assumption. Now that all these suppositions, there is a little behind the scene mathematics and in a forthcoming movie I could actually show you how to compute what the real mortgage is.
However, for a $500,000 loans, well, a $500,000 home, a $375,000 loans over 30 years at an interest of 5.5 per cent. I' m gonna make a mortgage payout of about $2,100. Now that I have purchased the property, I would like to present some words and phrases and we have spoken about them in some of the other video clips.
This is about an estate that' known as a home. We' re thinking it's $500,000 or more. We' re guessing it's $500,000 in value. Well, there is a commitment to this property, this is the mortgage credit, this is the commitment of $375,000, $375,000 loans or debts. So if you are, if this was your record.
By selling the home, you get the right to get the property, you can get the cash and then repay it to the local banks. However, if you were to complete this deal immediately after the execution, you would have done it, you would have a $500,000 home, you would have paid off your $375,000 debts, and you would have got $125,000 in your bag, which is exactly what your initial deposit was, but this is your own capital.
As for the reasons why I underline it now, I am, in this movie I am not going to accept anything about the House prices, whether it goes up or down, we are accepting that it is consistent. So you can kind of consider equities as how much value do you have after you are paying off the debt for your home?
So if you sold the place, you'd repay the debts, what do you have for yourself? So this is really kind of yours, this is the true riches in the home, this is the occupant, this is what you own, riches in the home or the intrinsic what the occupant has.
So so you can guess that there are actually 360 lines on the real spread sheet here and you will see that when you go and open it. Well, the zero I' m not showing here, you loaned yourself $375,000. Now later this month they' going to be charging you 0. 46 per cent interest, recall that that was 5.
Five per cent split by 12. Zero. 46% of the interest on $375,000 is $1,718.75. Well, I haven't made any mortgage repayments yet. Well, I lent myself $375,000, so much interest was basically added, it was accumulated. So now, before I make one of my payment, instead of paying $375,000 at the end of the first monthly period, I am in debt for $376,718.
Now I am a good bloke, I am not going to fall behind on my mortgage, so I make this first mortgage payout that we have billed, which we have billed directly here. So after I have made this deposit, then I am basically what is my credit balance after this deposit? Well that was before the payout, so deduct the payout from it, that's my credit balance after the payout.
According to the credit statement, after my first installment, I now have 125,410 dollars stock. Now you' re probably saying, hey, gee, I have a $2,000 disbursement, a disbursement of about $2,000 and my capital only went up by $410,000. So that very, in the beginning, your $2,000 installment your installment is mostly interest.
However, like you, and then you, and then you, and then, and then, as your credit balances decrease, you will be paying less interest here and so each of your repayments will be weighed more toward capital and less toward interest. Then, to find out the next line, this interest accumulated exactly here, I took my mean, your old, your credit balances left the last few months multiplied that time 0. 46 per cent and you get this new interest accumulated.
That is your new advance payout amount. I' ll repay my mortgage. That'?s my new credit balance. All right. Throughout 360 month you will see that there is a real, considerable discrepancy. These are the interest and redemption components of our mortgage payments. So this overall amount is if you realize this is the accurate, this is exactly our mortgage payout, this is $2,129.
You saw now, in that first one month, that of my $2,100 only $400 of it, that is the $400, only $400 of it went to actually make the capital payment, the real credit amount. On the other hand, as I begin to disburse the debt feather as the debt position becomes inferior and inferior all the case of my commerce, location are inferior curiosity to commerce, let me do a superior interest than that.
There'?s less interest, say, if we go out here, that's 198 months, over there, there was less interest last week, so more of my $2,100 actually goes to repay the loans. By the time we have all the way to 360 and you can show it, you will see this in the current table, in 360 months my closing will disburse all the capital, very little, if anything, then that is interest.
Well, many once you will listen to how finance consultants or estate agents tell you, hey, the advantage of purchasing your home is that it is, it has fiscal benefits, and it does. It'?s your interest, not your entire paycheck. So all this 30 years I pay $2,100 a months or $2,129. 29 a months.
Now that we go on and on every single day of the week, I get an ever smaller and smaller tax-deductible part of my real mortgage amount. While I prepare to repay my whole mortgage and get the ownership of my home. Recall, my real repayments are higher than that because some of my repayments went to actually down the loans.
Let's put the credit aside, let's say I made $100,000 a year and let's say I paid about 35 per cent for that $100,000. Let's say you know, if I didn't have that mortgage, I would have paid 35 per cent tax, which would be about $35,000 in tax for this year.
35% of it, let's get the pocketbook out. Let's get the pocketbook. So another way to think about it, if I was paying $10,000 interest, I will, and my overall income is 35 per cent, I will be saving 35 per cent of this in real income duties. So for example just off the first month of the year you were paying $1,700 in the interest of your $2,100 mortgage payout.
So 35 per cent of it, and I got the 35 per cent as one of your guesses, 35 per cent of $1,700. You can see how this changes basing on different interest rate, different amount of loans, different down payment, different term, different tax rate that will actually vary, different amount of taxes saved and you can toy with the different kinds of mortgage in this table.