Paying off your mortgage biweekly is often portrayed as a revolutionary way to save on interest payments. In collaboration with Todd Langford, the founder of Truth Concepts, we delve deep into the mechanics of biweekly mortgage payments.
In an earlier video, we explored the 15-year mortgage versus a 30-year mortgage, focusing on factors like opportunity cost and interest rates. If you haven't watched that yet, consider pausing this and watching it first as it lays the groundwork for today's topic.
How Does Biweekly Payment Work?
Many claim that switching to biweekly payments will save you enormous interest costs over the life of your mortgage. But what does that actually mean?
- Instead of paying your mortgage monthly, you split the payment in half and pay every two weeks.
- This results in 26 half payments per year, equating to 13 full payments annually.
Herein lies the so-called “magic” of biweekly payments: you make one extra payment each year, which can significantly reduce the length of your mortgage and the interest you pay.
The Real Cost Breakdown
The conversation doesn't end with just making an extra payment per year. Todd Langford aids us in understanding what biweekly payments truly cost when considering time and opportunity.
- By making additional payments, the term of the mortgage can reduce significantly (typically around five and a half years off a 30-year term).
- This leads to a considerable decrease in interest payments over time.
For example, on a $400,000 mortgage at 6% interest, a traditional monthly payment might mean paying $863,000 in total interest over 30 years. Biweekly payments reduce this to around $366,000, saving nearly $100,000 in interest.
The Bigger Picture
While interest savings are appealing, they aren't the full story. We must account for opportunity cost—the earnings lost by tying up money in a mortgage payment rather than investing it elsewhere.
We examined several scenarios, all yielding different outcomes based on mortgage length, interest rate, and payment strategy. One constant was clear: understanding individual financial discipline and goals is paramount.
Would a 30-year mortgage with disciplined investing of the monthly savings yield more? It's crucial to tailor decisions to personal habits and financial goals.
In Summary
The allure of biweekly payments lies in slightly altering your payment strategy to reduce interest costs significantly, but remember:
- It's essentially about adding an extra payment each year, not just the biweekly structure.
- Consider opportunity cost and your financial discipline when evaluating mortgage options.
Join us for further exploration into mortgage strategies and align those with your broader financial vision.
Full Transcript
All right, we're gonna talk about paying off your mortgage By weekly there's a lot of videos out there that say that this is the best thing since sliced bread and you get to save a ton on interest I'm I am in a series with Todd Langford the founder of truth concepts and we're trying to set the records straight as it relates to truth Money and how all of that works We did a video before this and if you have not watched this It's all about the 15 year mortgage versus a 30 year mortgage and we do a deep dive on all things Opportunity cost interest rates. We look at a ton of factors We even mix it up and just say philosophy It's a much much watch if you're someone who's thinking about what you should do in a mortgage or whether you're an advisor or a coach or Someone that helps people with money like I would highly highly recommend even pause this video and watch that video first Because it's gonna give you a solid foundation But then we're going to continue that conversation and say how do we take that same Logic and what we talked about and address it to this thing that's been going viral on the again What I call it like that the new magic wand of paying off paying your your mortgage by by monthly or by weekly and You get to save all this interest in this magical thing the banks won't tell you this Here's how you pay off your mortgage three years if you set up the pay by weekly payments rather than monthly payments You end up making one extra payment per you it might not sound like much right but it actually is So just one extra payment every year will shave off of your years Not over 30 year and save you tens of thousands on interest Did you know that making by weekly mortgage payments will knock seven years off your mortgage? But here's what you need to know so first of all when I say by weekly payments I don't mean doubling your mortgage payment every month what I mean is you're taking your mortgage payment Let's say it's two thousand dollars and you're divided in half So let's say a thousand dollars and you're taking that thousand dollars and paying that payment every two weeks So what that means is that instead of making twelve full monthly payments you are actually making twenty six half payments Which equals one extra payment per year and so without further ado? Todd welcome back and I'm excited for this this video. Thanks Caleb It really is such a confusing emotional area of the mortgage right and and there's so much information out there And unfortunately a lot of it's just not true, but there are it's based in Truth right it's just not the whole truth necessarily and and part of that has to do around Interest rates and like say we talked about it in the last video a little bit and it's so limited when we don't have Opportunity we don't talk about time. I mean it would be correct if everything was about today But we're talking about over 30 years. We have to add the element of time and so what happens with this idea of the biweekly mortgage So if you think about it people think that it's magic, you know, it'll trim Seven years six years off my mortgage and save, you know $80,000 in interest that I'm gonna have to pay on that mortgage But it didn't come for free and so the magic is not the biweekly It's the amount of money that's going in and we're gonna break that down and so what happens is when we pay by weekly We're actually paying 26 payments a year we've got 52 weeks in a year if we pay every other week we're paying 26 payments now all except for February most months are four and a half weeks long, right? so We actually on the biweekly since we pay 26 Payments that are half of what our monthly is we actually pay 13 annual payments so the magic really comes in the fact that we're making an extra payment every year on our mortgage and so people look at it It is free. Hey, I'm just paying the same amount I'm doing half a month in two weeks, but it's not the same amount. It's an extra payment every year So we're putting more money in so we're break that down and see what that looks like, right? Does the premise kind of makes sense so far though? Yeah, yeah, I'm yes, I'm not in my head premise makes sense But before we jump into the biweekly what I want to do is for those advisors that are out there What we went over last time with 15 years versus 30 year mortgage can be a little daunting Your first time through with the different calculators that we use just to prove and help understand what we're doing So there is a macro here. It is the macro mortgage Link comparison calculator and it will step you through all of the calculators as you go through it and bring those pieces and parts up just like we did in the last video But with some prompts and guidance so it's it's easy to get to that point until you're Comfortable with how those numbers work and you can see them over and over again easily Okay, so let's step through what we did last time quickly And so here we have our $400,000 mortgage it asks us the mortgage length it asks us the time for the right on that mortgage we used 6% It wants to know the longest mortgage time 360 it wants to know the the time frame for the other mortgage which is 180 It comes up and shows us the two mortgages the difference in the interest rates or the accumulative payments over this time frame And then now as we step through we can see what happens with cash as well So we have the 30 year mortgage the 15 year mortgage and cash and what those cumulative payments would be over this time frame And we see on the 30 year mortgage $463,000 of interest above and beyond the principal 207,000 above and beyond the principal on the 15 year mortgage and Zero interest above and beyond the principal on the cash option When we go to next we can see here that that decision to take $400,000 out of our cash to pay off the house would actually Calls us to lose the earnings that would groan that out to 2.4 million dollars over that time frame So while we look at no interest being paid and actually calls no interest to be earned on those dollars as well And so when we don't earn it we lost over two million dollars by making that decision But if we did that we would free up the payment that we have on the 360 month mortgage and we could funnel that into a Side fund at 6% if we did that look at that we end up with the same $2.4 million dollars. So either one of these decisions At the 30 year mark our houses paid off and we're gonna have $2.4 million as long as we're disciplined right and then if we look at the 15 year mortgage the first part of it just the first 180 months where I'm making a payment grows to 981,000 But that in order to be valid has to have the same illustration period and we take that out the rest of the time frame With no additional payments. We see that's the same 2.4 million dollars So either way either of these three decisions actually have the same gross Cost when we include time in the form of opportunity cost right Right Okay, when we go to next here we see across the top 2.4 million 2.4 million 2.4 million Evening of those decisions when our interests rates are the same We're gonna result in the same gross cost now if we could deduct this mortgage As we can in the in the US and a 24% bracket Then what we see now is the one that's supposed to be the most expensive that 360 month mortgage that we pay More interest on truly than the other ones It actually net of our tax deduction is the least expensive again assuming 6% on all the The cost and here we see our 2.4 million and both of them is the gross cost But that longer mortgage give us a larger tax deduction and therefore a smaller net cost over that 15 year mortgage Okay, so one of the things that we didn't talk about last time I went through the video and that is How inflation actually this is one of the areas inflation helps us because it's gonna reduce Um the way that payment feels it's gonna be a level payment all the way out of the future But because inflation is pushing the cost and everything else up and this is staying flat It actually reduces and so think about it. That's part of the reason the banks Offer us a lower rate for that longer mortgage. They don't want those deflated dollars out in the future But if we just look at this on that longer mortgage and let's say we had a 4% inflation rate that 2398 dollar payment today is only gonna feel like seven hundred and twenty three dollars out there 30 years from now It's still gonna be the same 2398 payment. It's just that our income and everything else has gone up Wow, this didn't and so it actually has the impact of feeling less out there on the future Yeah, I'll just I'll just in summary if if you have not watched the first video that Todd and I went through Highly recommend you go through it because there's a lot of conversations that we have but in summary if the Numbers are the same you can't say a 15 year mortgage or paying off you know cash Yes, you save interest, but you need to factor in what you could be earning and at the end of the day At the same interest rate assumption. It's identical But then when you start factoring in tax advantages inflation Opportunity of potentially having extra capital versus not like when you start factoring in other scenarios There tends to be a lot of benefits of potentially using a 30 year mortgage as a tool Invest in the difference potentially could give you more options and whatnot or if you don't have any discipline If you have zero discipline, you're not you're gonna spend the difference You can make the argument that a shorter mortgage or maybe even paying cash for something Is great if you're just gonna spend the difference I think there's the math can only take us so far you ultimately have to use facts and translate that into What am I gonna do with my situation and the outcomes that I want but at the end of the day This is a this alone could be an amazing summary for people to take a step back So with that Todd let's talk about the biweekly Concept of you know taking the same quote unquote payment paying biweekly, but you've been said early on in the video that you're actually adding an extra month Which is which is great But again, that's that's people's point. They're like yeah, I exactly like I'm almost tricking or helping people encouraging people to pay extra towards their mortgage And wall law use you you pay after mortgage in seven years less by not even over over paying that much It doesn't feel like that much But it's like it's like this magical thing that like knocks off years of Of my life on the mortgage payment and it helps me save a ton of interest Well and think about it before we get into it if you what it's doing is So when we shorten our mortgage time we're increasing our payment right we're increasing our Opportunity cost it's more of our resources rather than go into savings or having to go into the mortgage when we make that decision Well, a biweekly mortgage is really it's it's that same impact Right, it's gonna short the mortgage time, so but let's let's walk through it Where it's a little easier to understand so if we can clear this out and let's put in our 360 min because our illustration period Again, we're gonna go to the longest of our mortgage time frame. We'll use the same $400,000 mortgage that we did before And let's use the same 6% rate and 360 mites on this side and let's look at the comparison And we'll look at loan too. So this is just keeping our 30 year mortgage all the way out and we have to kind of Trick this a little bit to get the information in here. So we've got $400,000 over here on this one But I want to change my payment and so let's figure out what our Payment ends up being and so what we're gonna do is we're gonna get just a a handheld calculator and Our same 239820 divided by 2 Right because we're gonna pay half of that payment Every two weeks $1,199 Every two weeks, right, but we're gonna make 26 of those payments Correct So times 26 and let's divide that by 12 in other words thinking about the same monthly time frame And so rather than effectively paying 23 98 a month We're actually gonna pay close to 25 98 a month So let's take this 25 98 Right click on it Calculate type in 25 98 Okay, so what happens here is When we pay a biweekly payment Off of a payment that is monthly 23 98 20 is the same thing as paying 25 98 oh five Every month because we're actually now paying 13 monthly payments because there's again 26 biweekly payments And half of that is 13 and that's where the quote magic comes from in why this shortens the time frame and if we scroll down By paying that additional payment it has the impact of paying this mortgage off in 95 and a half months, right? So there's five and a half years ahead of time And what that does is from an interest standpoint if we look at our cost summary We can see and this is where a lot of people talk about this We've gone from 863 $3,000 on the longer mortgage the 360-month mortgage all the way out which means we paid $463,000 in interest right above and beyond the principal Versus $766,000 or $366,000 in interest so there's almost a hundred thousand dollars difference in interest paid By paying that biweekly mortgage but it's not any magic in the biweekly It's simply in the fact that we're making an extra payment area right? It's just more money going in But just like we did before in the example between the 15 year and the 30 year mortgage we have to account For those cash flows it's not just interest but it's interest and time and opportunity And when we look at that if we put six percent savings right up here on both of these should be identical It's actually Not because we put more money in up front. It's okay. Yeah. I guess if I'm factoring in if you save the difference of You take it would be yes. Yes, but yeah, you're you're correct and off of this off of these inputs. You're correct Yeah, and so what happens here is because we're applying more money to it and short in the time frame We actually have a A Cost that's it's close. It's just barely of just a little bit over what it is on The you know the full pay mortgage It's really not a big difference between these two and yet we pay to a hundred thousand dollars difference in interest And that's where the hook is that's where we get fooled into hear about things and it's true. We do pay less interest But that's not really a measure of anything because time is not in that equation and so I know that's a difficult way to look at it, but think about it like this for just a minute So we paid an extra payment every year right? What if we saved that payment in a different spot for six? I think this will help bring it around So copy that payment of 239820 And if we chose not to do the biweekly We would have that That we could grow out into the future And so let's get a future value calculator And what I'm going to say is we don't have the whole thing at the beginning We spread it out through the year right so to be closer to be inaccurate what I want to do is Go ahead and paste that into the annual payment and then we're going to adjust it What I want to do is divide that out of over 12 months yeah And so Click back in there on that and go to the beginning of it Put an equal sign And at the end of it divided by 12 so it's a hundred and ninety nine eighty five a month basically over 295 months at six percent and Put that on top and scroll down and Look at that we have enough to pay it off Yeah So so the difference is it didn't do anything for us From the standpoint of paying off our house it did pay it off faster But it a cost of not having that money sitting outside of the house We have access to it in the event of an emergency or ideally an opportunity right And so it's just a shift between the two It's talked about about being this great savings vehicle where we saved a hundred thousand over the other one We're actually in the same spot Except we have less options Because now the money's tied up in the house where they may not let us have it versus having an outside Where it would serve us in an emergency or opportunity right? That's right. That's right So it really goes back to if you're someone that is Disciplined You can invest you see the value of this 100 percent but there's a lot of people that aren't investing the difference and this is And if that's the case at a zero percent opportunity cost example or even a negative because you're spending all it like then Then yeah, there's nothing magical about pre paying your more like of course you're gonna save interest We just have to look at you can't say that this is like It's it's you have to factor in the opportunity cost of being able to Earn earn as well and I don't know if there's anything that you want else want to add to that but I appreciate you breaking that down Yeah, well, I think and I know this was a little hard to get some go back through it a couple of times and and see if it makes sense if it doesn't You know comment will will will adjust but but there's a this is the bottom line. I think there's a difference between interest paid Yeah An interest cost and that's where the big difference is and people have lumped those In to mean the same thing and they're really completely different. That's right. Humal of interest is not the same as interest cost That's right No, I appreciate I appreciate you breaking this down and a couple things I just want to say if you're If you're an advisor if you're someone that's like I would love to use truth concepts in my meetings as it break this down There'll be a link down below to truth concepts for you to learn more about That amazing calculator suite education community and and all the things that it included with with that and then if you're someone that's like Man, I want to learn more. I want to talk to someone as relates to that knows this stuff. There'll be a link Also for the consumer who's watching this is like I want to talk to someone who knows what they're talking about and then we'll also have a book If you're like, hey, I want to read a book that helps me flesh this out more. We'll have a book down below So lots of lots of different call the actions, but we desire to help people really take their next step as relates to their financial journey and hopefully these videos Can help counter get you to start thinking differently from a TikTok or a YouTube video That's really selling one strategy based on a half truth or it's like true, but if they're not factoring in The opportunity cost of what you could do in in that scenario and anything else Todd that you want to say as we talk about by weekly payments Okay, so This was a little confusing. I know, but let's just reiterate one point and that is If we were to funnel that difference in that payment each month and do another account Over the 295 months in other words the time frame When that accelerated mortgage by doing the biweekly option would pay off If we didn't do that and we funneled that money into another account we'd have $134,000 It's called and if we look down there on our 30 year mortgage to that 295th month look at that we have enough to pay it off. It's basically the same Dollars I could either put them in the mortgage all along the way and have it paid off at that point in time or I could collect it outside And have enough to still pay it off at the same point with the same cash flows and that's the part that's kind of left out of the analysis The thing we need to think about is the opportunity along the way by having this side fund that's growing that could protect us against loss of job We couldn't make our mortgage payment now. We'd have a source getting those dollars to do that But then this is also dependent on whatever interest rate we are in Um, it might be less than that Right if it was say 4% Mm-hmm, then it's only a hundred so we wouldn't have enough to pay it off But it also might be a lot more than that. What if it was 8% instead wow We'd actually have $50,000 more in that scenario Just in cash with that differential dependent on what we're doing so there could be a drastic difference between the two But let's just assume it was the same with our mortgage at 6% There's another fact to hear that I think it's important and it goes back to what we talked about in the last video About what happens when we accelerate the pay off on our mortgage when we do that We actually reduce the amount of interest and therefore reduce the amount of interest reduction So even though we see right here we're basically in the same position if we could earn six outside Our mortgage at 6 we'd have enough to pay it off in the same time frame as long as we're disciplined with our cash flows and spend exactly the same amount of money in either scenario But what does that do to us from the standpoint of getting our tax reduction? So now if we put 24% on our tax brackets on both of these We're actually going to have a higher tax deduction on that longer mortgage because we're not eaten up that Interest is fast and therefore our tax deduction So even if they were the same Mechanically at the end of that time frame from from spending the same dollars We also have the advantage of an additional $50,000 30 or 48,000 in Tax savings and that may not show up in a place where we can see it easily But in our overall Financial picture it should because that's going to offset taxes that we have to pay on other savings vehicles that we have right? Yep I can guarantee you that the TikTok videos don't go into this much detail when they're talking about The biweekly payments Todd thank you I also just want to say we are putting together something on velocity banking We're getting we're hearing a lot from people about this concept of velocity banking So if that is of interest to you and you have questions Please put that in the comments and subscribe to this channel because there's going to be More conversations to come and we're going to continue this You know quest on trying to shed truth into every area and not just look at what sounds good But like really say what does the mass say about certain scenario a versus scenario b Todd thank you again for taking what could be a very very complex topic And making it quite simple using calculators and so I appreciate your time today Well, thanks Caleb. I appreciate what you're doing out there to get the word out I don't know if I made this simpler, but it's accurate. So watch it and watch it again and Yeah, if you have comments send them in and if you want to be a ninja like this like Todd Sign up for truth training. So there'll be a link down below It will be the best couple days and money that you can spend as relates to helping you be more competent And so that's just a shameless plug for what you guys do they can find out more at chief concepts.com
