Should I sign up for bi-weekly mortgage payments?

If you have a mortgage loan, you have been hit with a solicitation to sign up for bi-weekly payments. There is an obvious convenience to having your mortgage payment coincide with your paycheck every two weeks. But do these programs really save you money? And, how do they work?

The short answer is yes, you can save money by paying bi-weekly as opposed to monthly. These programs work because by paying bi-weekly, you are making 26 half payments annually as opposed to 12 full payments, resulting in an extra month's mortgage payment. This additional payment is used to pay down your principal, which will result in cutting up to 6 or 7 years off the term of a 30-year mortgage. But the downside is that the companies that manage these programs come with a price tag, as much as $4 to $10 a month.

Some services will tell you that by paying bi-weekly, you can lower your APR or your compound interest. This is not correct. In fact, most likely the service that is collecting 26 payments a year from you is still paying your mortgage monthly, and accruing the excess payment until they are holding a full month's payment, at which time they will submit it to your lender. Besides the convenience of matching the timing of your payment with your paycheck, these programs simply result in paying down your mortgage loan faster by making an additional payment annually.

Right for you?

So, before accepting the solicitation, consider your options:

1. Instead of paying someone to hold your money for you, pay yourself! Every 2 weeks, move 1/2 of a monthly payment into an account you have set up at your bank. Make your monthly payment from this account. At the end of each year, you will accumulate enough in the acccount to make a 13th payment to your lender.
2. Contact your lender and see if they will accept a half-payment every two weeks, without enrolling in a service or paying a fee. Some lenders will permit this, but make sure to write on the coupon specific instructions on how you want them to apply your payment.
3. Pay your lender an additional 1/12th payment each month. Again, make sure to send written instructions stating you want the additional payment applied to principal.

If you like the convenience and savings of making bi-weekly payments but lack the self-discipline to follow through with a self-managed program, perhaps a fee-service program is for you. Just remember, it doesn't cost you anything to make additional payments to principal on your loan.