Do you really want to pay your mortgage Bi-Weekly?

If you have a mortgage, you may have received and invitation from a bank or mortgage servicing company to make your payments bi-weekly.

The Good thing about this:  Paying half of your mortgage every two weeks could coincide evenly with your paycheck schedule.  Plus you can pay off your mortgage six to eight years early.

Why is it not a good idea?:  Many of the programs come with a hefty price tag.  if you are interested in paying half of your mortgage every two weeks instead of making one full payment every month, get all the details from the institution offering the program, including all of the fees and charges.

If you are serious about this, you could get the same results for free.

Myths and advantages

You need to understand what bi-weekly mortgage programs will and will not do for you.  Here are two common misunderstandings:

Paying your mortgage twice a month gives you better credit.    
NO.  Banks often use an automatic bank draft for their bi-weekly plans, which means all your mortgage payments will be made on time, and that will help your credit.  But you can get the same effect on a monthly plan using electronic bill payment or an automatic bank draft.

Paying twice a month reduces the compound interest on your mortgage.

WRONG.  In fact, even though you are paying biweekly, chance   are, your loan servicing institution is paying your loan monthly.  Which means that if you buy into bi-weekly plan, you are actually loaning the servicing company half of your mortgage payment (interest free) for at least two weeks every month.  What will reduce your interest are the two additional half payments going toward the principal each year.  In other words, by making 26 payments of half your mortgage, you are in effect making 13 monthly payments instead of 12.

Depending on the terms of your loan, and who you ask, one extra payment a year will enable you to pay for your house and average of six to eight years ahead of schedule.

The price tag
Biweekly payment programs are easy, but the convenience comes at a cost. Many lenders offer two ways to pay: upfront or as you go.

Of the top five mortgage-servicing institutions, four charge enrollment fees that range from $295 to $379. Three also levy additional charges on every transaction. If you want to pay as you go -- without the hefty upfront charge -- fees from the same top five servicers average from $4 to $9 a month.

Is it for you?
If you are wowed by the convenience of having the bank automatically draft a payment that coincides with your biweekly paycheck, don't have much discipline when it comes to money and don't mind the extra fees, then you might want to consider a biweekly payment schedule. 

Some questions to ponder:

1. How long are you planning to stay in your house? Granted, any extra money you pay to your mortgage will likely come back as equity when you sell. But if you're looking for a good deal from a biweekly payment plan, you want to be in the house a substantial number of years.

2. How close is retirement? If you'll soon be receiving your retirement money monthly, do you want to spend money setting up a biweekly payment plan?

3. Would an early payoff on your mortgage facilitate other planned financial goals, like sending kids to college, changing careers or early retirement? Or would it make those plans more difficult?

4. Is there a better way to spend this money? "Do you have a Roth IRA?" "Are you making the maximum contribution to your retirement? Something about owning your own home is satisfying. But when you're talking about looking at your home as an investment, look at all the investments you could be making with that money."

Free alternatives to bi-weekly programs

While hundreds of thousands of mortgage holders have signed up for bi-weekly payment programs, they represent only a tiny fraction of the overall number of mortgage holders, according to estimates from the top five loan service providers.

A true biweekly mortgage -- one that you set up when you buy your house or when you refinance -- is rare. Not every lender offers them. In any case, remember that it's possible to get many of the same benefits of a biweekly payment schedule for free.

Here's how:

1. Pay an additional one-twelfth of your mortgage each month. Designate on your coupon that the amount should go against the principal.
2. Contact your loan service agent and find out if you may start sending a half-payment every two weeks without enrolling in their biweekly program. Some banks flat out won't allow it. In some cases, the loan agreement prohibits partial payments. Some mortgage servicing companies will permit it -- but you must write out very specific instructions with each check so that they know where and how to apply the money. If your mortgage institution doesn't seem willing to oblige, don't try this option.
3. If you get a bonus or tax refund each year, add the equivalent of one extra payment to your mortgage. Again, tell the bank that the additional money goes toward the principal.
4. If you get paid biweekly, take half of your mortgage payment from each check and put it in a savings account. At the beginning of the month, write your mortgage check from that account. At least twice a year you'll be including the equivalent of an extra half-payment. Specify on the mortgage coupon that the additional money goes against principal.