Let's say that there is a house that I like, let's say that that is the home that I would like to buy. It has a cost of, let's say that I require to pay $500,000 to purchase that house, this is the seller of the home right here.
I would like to purchase it. I wish to buy your house. This is me right here. And I have actually had the ability to save up $125,000. I've been able to save up $125,000 but I would truly like to reside in that home 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 provide me the remainder of the amount I require 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 look like, uh, uh, a nice person with a great job who has a good credit score.
We need to have that title of the home and when you pay off the loan we're going to provide you the title of the 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.
The 45-Second Trick For How Home Mortgages Work
But the title of the house, the file that states who really owns your home, so this is the home title, this is the title of the home, home, house 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, possibly they have not settled their mortgage, 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 pledging 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, suggests dead, dead, and the gage, means pledge, I'm, I'm a hundred percent sure I'm mispronouncing it, however it originates from dead promise.
Once I settle the loan this promise 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 probably due to the fact that it comes from old French is the reason we don't state mort gage. We say, home loan.
They're truly describing the home loan, home mortgage, the mortgage. And what I wish to do in the rest of this video is utilize a little screenshot from a spreadsheet I made to actually 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 loan calculator, home loan, 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 mortgage calculator, home loan calculator, calculator dot XLSX.
The Ultimate Guide To Explain How Mortgages Work Balance From Fiance Owed
However simply go to this URL and then you'll see all of the files there and then you can just download this file if you desire to play with it. However what it does here is in this type 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 buying a $500,000 house. It's a 25 percent down payment, so that's the $125,000 that I had conserved up, that I 'd spoken about right over there. And then the, uh, loan quantity, well, I have the $125,000, I'm going to have 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 home loan, fixed rate, repaired rate, which suggests the rate of interest will not 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 borrowed will not change throughout the 30 years.
Now, this little tax rate that I have here, this is to really figure out, what is the tax cost savings of the interest deduction on my loan? And we'll speak about that in a 2nd, we can disregard it in the meantime. And then these other things that aren't in brown, you should not tinker these if you in fact do open this westland finance spreadsheet yourself - how do cash back mortgages work in canada.
A Biased View of How Mortgages Work Bogleheads
So, it's literally the yearly rates of interest, https://www.timeshareexitcompanies.com/wesley-financial-group-reviews/ 5.5 percent, divided by 12 and most home loan are compounded on a monthly basis. So, at the end of every month they see how much cash you owe and then they will charge you this much interest on that for the month.
It's actually a pretty fascinating problem. But for a $500,000 loan, well, a $500,000 home, a $375,000 loan over thirty years at a 5.5 percent rates of interest. My home loan payment is going to be roughly $2,100. Now, right when I bought your house I wish to introduce a little bit of vocabulary and we've spoken about this in a few of the other videos.
And we're presuming that it's worth $500,000. We are presuming that it deserves $500,000. That is a possession. It's an asset since it provides you future benefit, the future benefit of being able to reside in it. Now, there's a liability against that property, that's the home loan, that's the $375,000 liability, $375,000 loan or financial obligation.
If this was all of your possessions and this is all of your financial obligation and if you were essentially to offer the possessions and pay off the debt. how do buy to rent mortgages work. If you sell your home you 'd get the title, you can get the cash and after that you pay it back to the bank.
Getting The How Mortgages Subsidy Work To Work
But if you were to relax this transaction right away after doing it then you would have, you would have a $500,000 house, you 'd pay off your $375,000 in financial obligation and you would get in your pocket $125,000, which is precisely what your original down payment was but this is your equity.
However you could not assume it's continuous and have fun with the spreadsheet a little bit. But I, what I would, I'm presenting this because as we pay for 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 bigger.
Now, what I have actually done here is, well, in fact before I get to the chart, let me really reveal you how I calculate the chart and I do this over the course of 30 years and it goes by month. So, so you can think of that there's in fact 360 rows here on the actual spreadsheet and you'll see that if you go and open it up.