Will Paying My Mortgage Biweekly Really Pay It Off Faster?

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[00:00:13]>> David is in Denver. Hey David, what's up?

[00:00:16]>> Uh not much Dave. How are you?

[00:00:18]>> Better than I deserve. How can we help?

[00:00:20]>> Yeah, I'm on baby step six. I'm paying off my home. I have no debt at the moment. And I've been in the corners of the YouTube finance world and I found a video about bi-weekly mortgage payments >> Mhm.

[00:00:32]>> and signing up for that program.

[00:00:34]>> Mhm.

[00:00:34]>> So I'm currently owe $420,000 on a 5.98 30-year fixed loan.

[00:00:41]>> Mhm.

[00:00:42]>> And I'm 2 years in and I was wondering do you recommend that I sign up for the bi-weekly mortgage payments?

[00:00:48]>> Uh I would not pay a fee for it. Is there a fee associated with it?

[00:00:52]>> Yes sir. Uh to enroll Rocket Mortgage does require a single upfront mortgage payment which for me is $3,500.

[00:00:59]So I would have >> But they hold as a fee they take that as a fee?

[00:01:02]>> Wow.

[00:01:02]>> Uh no I do I guess not a fee. I think it goes towards the principal sir.

[00:01:06]>> Are you Is your mortgage with Rocket?

[00:01:09]>> Yes sir.

[00:01:10]>> Okay. Are they charging any fee for the service of the bi-weekly? An actual fee?

[00:01:16]>> I don't believe so sir. I believe they just asked me to make a one-time uh mortgage payment uh to enroll and then I am enrolled from then on.

[00:01:24]>> Okay. That's possible.

[00:01:26]I'm not real trusting of Rocket.

[00:01:29]>> Uh >> Cuz Rocket has a lot of shysters going on in there. So be careful. But let me let's walk through it. Here's why I'm asking that question. All right?

[00:01:38]So basically a bi-weekly mortgage is half a payment as you know David every 2 weeks.

[00:01:45]>> Yes sir.

[00:01:46]>> There are 26 2-week periods in a year.

[00:01:51]So 26 halves is 13 wholes.

[00:01:55]>> Right.

[00:01:56]>> Which means that a mortgage effectively pays a single payment extra per year.

[00:02:03]>> Correct.

[00:02:03]>> So, mathematically, you would be within $15 of this by simply just writing a check once a year for an extra payment.

[00:02:12]>> That's true. And so, I kind of thought like what >> There's no magic. Yeah, the bi-weekly is not magic. It's just a way to trick you into paying extra principal.

[00:02:23]>> I see.

[00:02:24]>> And that's the only thing that does it.

[00:02:25]So, if you just took your regular mortgage and once a year send an extra payment above your regular mortgage, you'll be within 10 or 15 dollars of the same exact result. So, it takes a 30-year mortgage and turns it into about a 23. It takes a 15-year mortgage and turns it into about a 12.

[00:02:40]>> I see.

[00:02:41]>> But, it's all done by an extra principal payment a year. And really, truthfully, you're on baby step six, so you may be doing more or less of an extra principal payment a year. Are you paid every 2 weeks?

[00:02:53]>> Yes, sir. I do have a salary position, so does my wife. We We earn about 186 186,000 dollars a year.

[00:03:00]>> So, it would be it would be kind of an autopilot thing to at least get one extra payment a year. But, I with those numbers you're giving me, I want you to put more than that on there anyway, don't you?

[00:03:11]>> Uh well, the problem is my my I have a 4-year-old son and I'm paying 22,000 dollars a year for daycare. Um and that just really hurts the budget. I do feel like I'm house poor. I feel like I'm kind of, you know, >> If you're house poor, you don't need to increase your house payment.

[00:03:26]>> Yes, sir. I'm just trying to pay this thing off as quickly as possible. Um currently, >> Well, the way you're going to do that is extra principal payments, not being house poor from daycare. So, you got to decide which which life is it you're living here. But, either way, I want you in baby step six for your sake to get the house paid off.

[00:03:44]And the way you're going to do that is extra principal payments. If you want to do that by setting it up as a bi-weekly and they don't charge you a fee to do it, see if they're you 500 bucks to do this or something, well, crap, no, I'll just send it an extra payment.

[00:03:57]>> Right.

[00:03:58]>> But, if they're charging you no fee and you want and you're paid bi-weekly and it's easy, yeah, let's do that, but let's also plan to do more.

[00:04:04]>> Excellent. And before I let you go, um I do uh earn $11,000 a month with my wife after taxes and my mortgage is 3,500, which equates to 32.2% of my monthly income.

[00:04:17]Uh since I'm on baby step six, I don't have any debt, do you still think I can keep this house? I know you always say sell the house, it's too much, but I really want this home.

[00:04:25]>> I think that you're feeling the squeeze, especially right now, because you have somebody in daycare and that's a that there's a seasonality there. That's not going to be like this for all time. So, I think that's why you're feeling the squeeze. If there's something you can do to offset that in the meantime, I would do it.

[00:04:42]>> Yeah, and that's not >> And that's putting the the take-home pay you outlined is after you put money in 401k, right?

[00:04:47]>> Yes, sir. My >> Yeah, see, that's not the number. No, that's not the number we're looking >> calculation.

[00:04:51]>> That's the wrong calculation. When we say take-home pay, we mean just after taxes only.

[00:04:55]>> Yes, uh yeah, it's uh 11,000 hits our joint account a month.

[00:04:59]>> I know, honey, but that's after they took money out for 401k.

[00:05:02]>> And probably insurance.

[00:05:04]>> Yes, sir.

[00:05:05]>> Those two numbers don't count in the calculation, so you're not at 32%.

[00:05:09]>> Oh, okay.

[00:05:11]>> That's what I'm saying. [laughter] The only numbers that count in the calculation for take-home pay is after taxes.

[00:05:17]Gross minus taxes. So, add back insurance, add back uh in your calculation and then say of that number, what percentage is it? And it's going to be down close to 25. So, you're you're fine. I don't think you're hurting here.

[00:05:30]I I think you're just you know, observing the fact that not only that you're not out of debt completely yet and even when you are, it's not a magic pill.

[00:05:39]It's just uh it's just a better place than being in debt. That's all.

[00:05:42]>> Everybody listening needs to understand what you just said about take-home pay, which is it is only the after-tax amount.

[00:05:48]>> When we say have your house be 25% of your take home pay on a 15-year fixed, we're talking about only after taxes, not after child support coming out, not after your car payment coming out and going to the credit union.

[00:06:00]Not after Not after insurance, not after 401k, not after Not after any of that stuff, okay? So, put all that crap. That's not what we're talking about. Good point.

[00:06:12]>> [music]