Let's say that there is a home that I like, let's state that that is your home that I would like to acquire. It has a cost tag of, let's state that I require to pay $500,000 to purchase that home, this is the seller of the home right here.
I want to purchase it. I would like to purchase the home. This is me right here. And I have actually been able to conserve up $125,000. I have actually had the ability to save up $125,000 but I would actually like to live 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 lend me the rest of the quantity I need for that home, 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 states, sure, you appear like, uh, uh, a nice guy with a good job who has a great credit rating.
We have to have that title of your house and when you pay off the loan we're going to offer 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.
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However the title of the house, the document that states who in fact owns the house, so this is the house title, this is the title of the 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, possibly they have not settled their home loan, 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 promising of the title for, as the, Browse around this site as the security for the loan, that's what a home mortgage is. how do mortgages work in canada. And really it comes from old French, mort, suggests dead, dead, and the gage, implies pledge, I'm, I'm a hundred percent sure I'm mispronouncing it, but it originates from dead promise.
As soon as I pay off the loan this pledge of the title to the bank will die, it'll come back to me. And that's why it's called a dead pledge or a home loan. And probably because it originates from old French is the factor why we don't say mort gage. We state, home loan.
They're truly describing the home loan, home mortgage, the home mortgage loan. And what I wish to carry out in the rest of this video is use 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 home loan calculator, home mortgage, or in fact, even better, simply go to the download, simply go to the downloads, downloads, uh, folder on your web internet browser, you'll see a lot of files and it'll be the file called home mortgage calculator, mortgage calculator, calculator dot XLSX.
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But simply go to this URL and after that you'll see all of the files there and https://www.bloomberg.com/press-releases/2019-08-06/wesley-financial-group-provides-nearly-6-million-in-timeshare-debt-relief-in-july after that you can just download this file if you wish to have fun with it. However what it does here remains in this sort of dark brown color, these are the assumptions that you could input which 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 deposit, so that's the $125,000 that I had actually saved up, that I 'd talked about right there. And then the, uh, loan quantity, well, I have the $125,000, I'm going to need to borrow $375,000. It computes 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, fixed rate, which means the interest rate won't change. 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 throughout the thirty 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 talk about that in a 2nd, we can disregard it for now. And after that these other things that aren't in brown, you should not tinker these if you in fact do open up this spreadsheet yourself - reverse mortgages how they work.
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So, it's actually the yearly rates of interest, 5.5 percent, divided by 12 and most home loan are intensified on a month-to-month basis. So, at the end of monthly 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 in fact a pretty intriguing problem. However for a $500,000 loan, well, a $500,000 house, a $375,000 loan over 30 years at a 5.5 percent interest rate. My mortgage payment is going to be roughly $2,100. Now, right when I bought your home I want to introduce a little bit of vocabulary and we have actually discussed this in some of the other videos.
And we're assuming that it's worth $500,000. We are assuming that it deserves $500,000. That is an asset. It's an asset because it provides you future benefit, the future benefit of being able to reside in it. Now, there's a liability versus that property, 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 sell the possessions and settle the financial obligation. how reverse 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.
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However if you were to unwind 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 deposit was however this is your equity.
However you could not presume it's constant and play with the spreadsheet a little bit. But I, what I would, I'm introducing this due to the fact that as we pay down the debt this number is going to get smaller. So, this number is getting smaller sized, let's say eventually this is only $300,000, then my equity is going to get larger.
Now, what I have actually done here is, well, in fact prior to I get to the chart, let me in fact reveal you how I determine the chart and I do this throughout thirty years and it goes by month. So, so you can picture that there's in fact 360 rows here on the actual spreadsheet and you'll see that if you go and open it up.