Bank, can you lend me the rest of the amount I need for that house, which is basically $375,000 (how do second mortgages work). 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 great person with a good task who has a good credit ranking.
We have to have that title of the house and once you settle the loan we're going to give you the title of your home. 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 - how do reverse mortgages work in california.
However the title of your house, the document that says who in fact owns your house, so this is the house title, this is the title of your home, house, 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, maybe they haven't settled 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 mortgage is. And in fact it originates from old French, mort, means dead, dead, and the gage, means promise, I'm, I'm a hundred percent sure I'm mispronouncing it, but it originates from dead promise.
Once Visit this page I pay off the loan this promise of the title to the bank will pass away, it'll come back to me. Which's why it's called a dead pledge or a home mortgage. And most likely since it originates from old French is the reason we do not say mort gage. We state, home mortgage.
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They're truly describing the home mortgage, mortgage, the home mortgage loan. And what I wish to do in the rest of this video is utilize a little screenshot from a spreadsheet I made to actually show you the mathematics or really 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 home mortgage calculator, home loan, or in fact, even much better, just go to the download, just go to the downloads, downloads, uh, folder on your web internet browser, you'll see a bunch of files and it'll be the file called mortgage calculator, mortgage calculator, calculator dot XLSX.
But just go to this URL and then you'll see all of the files there and then you can simply download this file if you desire to play with it. what are reverse mortgages and how do they work. But what it does here remains in this kind of dark brown color, these are the assumptions that you could input and that you can alter these cells in your spreadsheet without breaking the entire spreadsheet.
I'm purchasing a $500,000 home. It's a 25 percent down payment, so that's the $125,000 that I had conserved up, that I 'd discussed right there. And after that the, uh, loan amount, 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 quite plain vanilla loan.
So, thirty years, it's going to be a 30-year set rate mortgage, fixed rate, repaired rate, which suggests the rate of interest will not alter. We'll speak about that in a bit. This 5.5 percent that I am paying on my, on the money that I borrowed will not change over the course of 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 reduction on my loan? And we'll speak about that in a second, we can disregard it in the meantime. how do reverse mortgages work in california. And then these other things that aren't in brown, you should not tinker these if you actually do open this spreadsheet yourself.
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So, it's literally the yearly rate of interest, 5.5 percent, divided by 12 and a lot of home mortgage loans are intensified on a monthly basis. So, at the end of every month they see just how much money you owe and after that they will charge you this much interest on that for the month.
It's really a pretty interesting issue. 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 wish to present a bit of vocabulary and we've discussed this in a few of the other videos.
And we're presuming that it's worth $500,000. We are presuming that it's worth $500,000. That is an asset. It's an asset due to the fact that it provides you future advantage, the future advantage of being able to live in it. Now, there's a liability versus that possession, that's the mortgage 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 financial obligation and if you were essentially to sell the assets and settle the debt. If you offer your house you 'd get the title, you can get the cash and then you pay it back to the bank.
But if you were to relax this transaction instantly after doing it then you would have, you would have a $500,000 home, you 'd pay off your $375,000 in financial obligation and you would get in your pocket $125,000, which is exactly what your initial deposit was however this is your equity.
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However you could not presume it's consistent and have fun with the spreadsheet a bit. However I, what I would, I'm presenting this since 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 larger.
Now, what I've done here is, well, actually prior to I get to the chart, let me really show you how I determine the chart and I do this over the course of thirty years and it goes by month. So, so you can envision that there's in fact 360 rows here on the real spreadsheet and you'll see that if you go and open it up.
So, on month absolutely no, which I do not show here, you borrowed $375,000. Now, throughout that month they're going to charge you 0.46 percent interest, keep in mind that was 5.5 percent divided by 12. 0.46 percent interest on $375,000 is $1,718.75. So, I haven't made any mortgage payments yet.
So, now before I pay any of my payments, rather of owing $375,000 at the end of the first month I owe $376,718. Now, I'm a hero, I'm not going to default best timeshare exit companies on my home mortgage so I make that first mortgage payment that we calculated, that we determined right over here (how do down payments work on mortgages).