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What I wish to make with this video is explain what a mortgage is but I believe the majority of us have a least a basic sense of it. However even much better than that actually go into the numbers and understand a little bit of what you are really doing when you're paying a home mortgage, what it's made up of and just how much of it is interest versus just how much of it is really paying down the loan.
Let's state that there is a house that I like, let's state that that is your house that I want to buy (why do banks sell mortgages). It has a cost of, let's say that I need to pay $500,000 to buy that house, this is the seller of the home right here.
I would like to buy it. I want to purchase your house. This is me right here - what are subprime mortgages. And I've been able to save up $125,000. how long are mortgages. I've had the ability to save up $125,000 however I would really like to live 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 rest of the quantity I need for that home, which is basically $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 Click here for info loan? And the bank says, sure, you appear like, uh, uh, a great man with an excellent job who has an excellent credit ranking.
We need to have that title of your house and as soon as you settle the loan we're going to provide you the title 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.
But the title of the house, the file that states who really owns your house, so this is the house title, this is the title of your house, house, home 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 have not paid off their home loan, it will go to the bank that I'm obtaining 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 loan is. And in fact it originates from old French, mort, implies dead, dead, and the gage, implies pledge, I'm, I'm a hundred percent sure I'm mispronouncing it, but it originates from dead pledge.
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As soon as I pay off the loan this pledge of the title to the bank will pass away, it'll return to me. And that's why it's called a dead pledge or a mortgage. And probably because it comes from old French is the reason that we don't state mort gage. what is the current interest rate for commercial mortgages?. We state, home mortgage.
They're really describing the mortgage, home mortgage, the mortgage. And what I wish to do in the rest of this video is use a little screenshot from a spreadsheet I made to in fact reveal you the math or in fact show you what your 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 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 home mortgage calculator, mortgage calculator, calculator dot XLSX.
However just go to this URL and after that you'll see all of the files there and then you can simply download this file if you desire to play with it. But what it does here is in this sort of dark brown color, these are the assumptions that you could input which you can change these cells in your spreadsheet without breaking the whole spreadsheet.
I'm purchasing a $500,000 home. It's a 25 percent deposit, so that's the $125,000 that I had actually 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 need to obtain $375,000. It determines it for us and then I'm going to get a pretty plain vanilla loan.
So, 30 years, it's going to be a 30-year set rate home mortgage, fixed rate, fixed rate, which means the rates of interest won't change. We'll discuss that in a little bit. This 5.5 percent that I am paying on my, on the money that I obtained will not change throughout the thirty years.
Now, this little tax rate that I have here, this is to really find out, what is the tax cost savings of the interest deduction on my loan? And we'll discuss that in a 2nd, we can disregard it in the meantime. And then these other things that aren't http://dallaspqst438.image-perth.org/h1-style-clear-both-id-content-section-0-the-smart-trick-of-what-are-the-debt-to-income-ratios-for-mortgages-that-nobody-is-discussing-h1 in brown, you shouldn't tinker these if you in fact do open up this spreadsheet yourself.
So, it's actually the annual rates of interest, 5.5 percent, divided by 12 and many home loan are compounded 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.
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It's actually a pretty fascinating problem. However for a $500,000 loan, well, a $500,000 house, a $375,000 loan over 30 years at a 5.5 percent rate of interest. My home mortgage payment is going to be roughly $2,100. Now, right when I bought the home I wish to introduce a little bit of vocabulary and we have actually discussed this in a few of the other videos.
And we're assuming that it's worth $500,000. We are presuming that it deserves $500,000. That is a property. It's a property due to the fact that it provides you future benefit, the future benefit of being able to reside in it. Now, there's a liability against that asset, that's the mortgage, that's the $375,000 liability, $375,000 loan or financial obligation.
If this was all of your assets and this is all of your financial obligation and if you were essentially to offer the properties and pay off the financial obligation. If you offer your house you 'd get the title, you can get the money and then you pay it back to the bank.
But if you were to unwind this transaction 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 exactly what your initial deposit was but this is your equity.