It's amazing how many people think bi-weekly mortgage payments save you money through some mystic hocus-pocus.

That's because in many borrowers' minds, "bi-weekly" translates as "half a regular mortgage payment, twice a month." If such a technique could cut years off the term of your fixed mortgage, (or reduce the total interest paid on an adjustable rate loan) it would be magic indeed.

But that's not what's happening.

Yes, you might make a half-payment on the 1st and the 15th of a month. But bi-weekly means "every two weeks", and you'd owe another half-payment on the 29th. The next month you would indeed pay only twice, but sooner or later, another three-payment month will show up.

If you pay every two weeks, that means 26 half-payments a year, the equivalent of 13 full payments. And it's that extra payment, applied entirely to principal once a year, that works the magic.

Your bank's computers are not set up to handle half-payments, and if you tried sending them in, you'd soon be embroiled in a confusing late-payment hassle. If you do want to achieve the same results, cutting approximately nine years off a 30-year loan, you can try one of three systems:

• If your lender offers it, enroll in its own bi-weekly payment plan. A few mortgage companies make the option directly available to their borrowers.
• Join a plan offered by an outside company that will take half-payments automatically out of your bank or checking account every two weeks, forward regular payments on your behalf to your lender, and once a year send in the 13th payment that has accumulated. They'll instruct the lender to apply the extra money entirely to reducing your principal and therefore your remaining term more quickly than originally scheduled.

Some service companies charge around $350 for enrollment in the plan, then levy a small monthly handling charge. They also make their money on the "float" while they are holding your money.

• And third, if you have the discipline, you can accomplish the same thing yourself, by simply accumulating one full payment during the year, and sending it in with a separate check, clearly marked "to be applied entirely to principal." And you'll have the $350 enrollment fee you saved, to get you started.

And it won't make much difference when in the year you make that extra payment.

No mystical hocus-pocus involved.

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Published: May 13, 1999

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