A bi-weekly mortgage is often touted as a fairly painless way for a homeowner to pay off their mortgage faster and save tens of thousands of dollars in the process. But is it really such a good idea?

On the surface, it looks like a pretty good deal. Instead of making a monthly mortgage payment, you pay half as much every two weeks. But because there are 52 weeks in a year, there are two months each year where you make three payments instead of two, which is the equivalent of making 13 monthly payments a year.

That extra "monthly payment" each year allows you to pay down your mortgage faster, anyway from four to six years faster than a regular 30-year loan. You also save a bundle on interest, because you're reducing the loan principal more quickly. Depending on your loan terms, a bi-weekly mortgage could reduce your total interest payments by $50,000-$60,000 over the life of a $200,000 mortgage.

For people who get paid weekly or every two weeks, it can sound particularly appealing, since they can simply take out the same amount from every paycheck for their mortgage payment. What's not to like?

Expect to pay more fees

Well, for one thing, there's the fees. Lenders typically charge an up-front or per-payment fee for setting up a bi-weekly mortgage, and sometimes charge both. These can range from several hundred dollars for the up-front fee and $5-$10 for monthly transaction fees. Over 25 years, that can add up to $1,500-$3,000.

"But so what?" you may say, "That's still a lot less than $50,000 saved over the life of the mortgage, right?"

Well, right - except that you don't have to do it that way.

Most 30-year mortgages these days allow you to make additional payments toward the principal without penalty. Meaning that you can simply pay more in those months when you get an extra paycheck, regardless of whether you're paid weekly or every two weeks.

The do-it-yourself route

If you're paid every two weeks, there'll be two months a year when you get three paychecks; if you're paid monthly, there'll be four months a year when you get five paychecks. Just increase your usual monthly mortgage payment by one-half or one-fourth (depending on how often you're paid) and you'll get all the benefit of a bi-weekly mortgage without the additional fees. Be sure to note on your payment that the additional money is to go toward principal reduction, and not toward interest.

If you're going to do a bi-weekly mortgage, you also want to make sure you'll own the house long enough for the reduced principal and interest to compound enough to make it worthwhile. If you're not going to be there for five to seven years, you may be better off putting the extra money into other investments, like a Roth IRA, stocks or CDs.

Timing isn't everything

One popular misconception about bi-weekly mortgage is that the more frequent payments save on interest because you're paying down the principal at more frequent intervals. The idea is that by making a payment in the middle of the month, you're reducing your principal and thereby the amount of interest charged in the second half of the month, compared to making a single payment at month's end. The savings gradually compound over time and eventually add up to a significant sum.

The problem is, mortgages don't work that way. Even if you're paying your servicer every two weeks, the payments are only credited to your account once a month, so you're still paying interest on the full principal remaining after your last payment. Credit cards and certain other debts often do work this way because they're recalculated daily, and regularly making small payments over the course of a month can help reduce interest costs on those debts. But not mortgages.

Can provide discipline

The one thing a bi-weekly mortgage can do for a borrower is provide discipline in making those extra payments each year. If you get paid on a weekly or bi-weekly payment schedule and just can't trust yourself to make those additional payments in those months when you get an extra paycheck, then yes, a bi-weekly mortgage might work for you and be worth the extra cost. Otherwise, simply making larger payments when those extra checks arrive will accomplish the same thing at lower cost.

Published on September 4, 2009