Bank, can you provide me the remainder of the quantity I require for that house, which is essentially $375,000 (reverse mortgages how do they 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 says, sure, you seem like, uh, uh, a nice person with a great task who has a great credit score.
We have to have that title of your house and as soon as you settle the loan we're going to provide you the title of the 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 variable mortgages work in canada.
But the title of your home, the document that says who actually owns the house, so this is the house title, this is the title of your home, home, house 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 haven't settled their home 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 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 comes from old French, mort, suggests dead, dead, and the gage, implies promise, I'm, I'm a hundred percent sure I'm mispronouncing it, but it originates from dead pledge.
As soon as I settle 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 promise or a home mortgage. And probably because it originates from old French is the reason why we don't say mort gage. We state, home loan.
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They're actually describing the home loan, mortgage, the mortgage. And what I want to do in the rest of this video is use a little screenshot from a spreadsheet I made to in fact reveal you the mathematics 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 home mortgage calculator, home loan, or really, even much better, just 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 mortgage calculator, home mortgage 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 desire to play with it. what are reverse mortgages and how do they work. However what it does here is in this type of dark brown color, these are the presumptions that you could input and that you can alter these cells in your spreadsheet without breaking the whole spreadsheet.
I'm buying a $500,000 home. It's a 25 percent deposit, so that's the $125,000 that I had conserved up, that I 'd discussed right over there. And then the, uh, loan amount, well, I have the $125,000, I'm going to have to obtain $375,000. It determines it for us and after that 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 indicates the rates of interest won't change. We'll speak about that in a bit. This 5.5 percent that I am paying on my, on the cash that I obtained will not alter 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 reduction on my loan? And we'll speak about that in a 2nd, we can disregard it for now. how do escrow accounts work for mortgages. And then these other things that aren't in brown, you shouldn't mess with these if you actually do open up this spreadsheet yourself.
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So, it's actually the yearly rates of interest, 5.5 percent, divided by 12 and most home loan are compounded on a regular monthly basis. So, at the end of on a monthly basis they see how much cash you owe and then they will charge you this much interest on that rent out timeshare for the month.
It's really a pretty interesting 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 home mortgage payment is going to be roughly $2,100. Now, right when I purchased the home I want to present a bit of vocabulary and we've 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 an asset. It's an asset due to the fact that it offers you future benefit, the future benefit of being able to live in it. Now, there's a liability against that property, that's the home mortgage loan, that's the $375,000 liability, $375,000 loan or debt.
If this was all of your assets and this is all of your debt and if you were essentially to sell the assets and pay off the debt. If you sell the house you 'd get the title, you can get the cash and then you pay it back to the bank.
However if you were to relax this deal right away after doing it then you would have, you would have a $500,000 home, you 'd pay off your $375,000 in debt and you would get in your pocket $125,000, which is exactly what your original Check out here down payment was but this is your equity.
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But you might not presume it's consistent and play with the spreadsheet a little bit. But I, what I would, I'm introducing this because as we pay down the debt this number is going to get smaller. So, this number is getting smaller, let's say at some point this is only $300,000, then my equity is going to get bigger.
Now, what I have actually done here is, well, really prior to I get to the chart, let me really reveal you how I calculate the chart and I do this throughout 30 years and it passes 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.
So, on month absolutely no, which I don't show here, you obtained $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 have not made any home mortgage payments yet.
So, now prior to I pay any of my payments, instead of owing $375,000 at the end of the very first month I owe $376,718. Now, I'm an excellent person, I'm not going to default on my home mortgage so I make that very first home mortgage payment that we determined, that we calculated right over here (reverse mortgages how do they work).