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There are really strict laws that were passed in current years that need lending institutions do their due diligence to provide you all the alternatives possible to bring your mortgage present or exit homeownership with dignity. how do second mortgages work. By understanding how your home loan works, you can safeguard your investment in your home, and will understand what actions to take if you ever have difficulties making the payments.
What I want to do with this video is discuss what a home loan is however I think many of us have a least a basic sense of it. However even better than that really enter into the numbers and understand a bit of what you are in fact doing when you're paying a home loan, what it's made up of and just how much of it is interest versus just how much of it is in fact paying down the loan.
Let's say that there is a house that I like, let's say that that is your house that I wish to acquire. It has a cost of, let's state that I require to pay $500,000 to buy that house, this is the seller of your home right here.
I would like to buy it. I would like to purchase the home. This is me right here. And I have actually been able to save up $125,000. I have actually been able to save up $125,000 but I would actually like to reside 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 lend me the remainder of the quantity I need for that house, 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. why do mortgages get sold. 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 great person with a great task who has an excellent credit ranking.
We have to have that title of your house and when you settle the loan we're going to give you the title of your house. So what's going to happen 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 house, the file that says who really owns the house, so this is the home title, this is the title of your home, house, home 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, maybe they haven't paid off their mortgage, it will go to the bank that I'm obtaining from.
So, this is the security right here. That is technically what a home mortgage is. This pledging 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, indicates pledge, 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 die, it'll return to me (reverse mortgages are most useful for elders who). Which's why it's called a dead pledge or a home mortgage. And probably since it comes from old French is the website reason that we do not say mort gage. We say, home mortgage.
They're really describing the home loan, home mortgage, the mortgage loan. And what I desire to carry out in the rest of this video is utilize a little screenshot from a spreadsheet I made to actually show you the mathematics or actually show 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 mortgage calculator, home 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 home loan calculator, home loan calculator, calculator dot XLSX.
But 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 wish to have fun with it. However what it does here is in this sort of dark brown color, these are the presumptions that you could input which you can alter these cells in your spreadsheet without breaking the whole spreadsheet.
I'm buying 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 talked about right over there. And after that the, uh, loan amount, well, I have the $125,000, I'm going to have to borrow $375,000. It computes it for us and after that I'm going to get a quite plain vanilla loan.
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So, 30 years, it's going to be a 30-year set rate home mortgage, fixed rate, repaired rate, which indicates the rate of interest will not alter. We'll talk about that in a little bit. This 5.5 percent that I am paying on my, on the cash that I obtained will not change over the course of the thirty years.
Now, this little tax rate that I have here, this is to really determine, what is the tax cost savings of the interest deduction on my loan? And we'll talk about that in a 2nd, we can neglect it in the meantime. And then these other things that aren't in brown, you should not tinker these if you really do open this spreadsheet yourself.
So, it's actually the yearly rate of interest, 5.5 percent, divided by 12 and many home mortgage loans are compounded on a regular monthly basis - how do mortgages work. 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 really a pretty interesting 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 mortgage payment is going to be approximately $2,100. Now, right when I bought your house I want to introduce a little bit of vocabulary and we have actually spoken about this in some of the other videos.
And we're presuming that it's worth $500,000. We are assuming that it's worth $500,000. That is an asset. It's a property due to the fact that it provides you future advantage, the future benefit of having the ability to live in it. Now, there's a liability versus that asset, that's the home loan, that's the $375,000 liability, $375,000 loan or debt.
If this was all of your possessions and this is all of your debt and if you were basically to offer marty anderson attorney the properties and settle the financial obligation. If you sell your home you 'd get the title, you can get the money and after that you pay it back to the bank.