Some advertisements promote the "Bi-Weekly Mortgage", offering to save you thousands of dollars on your thirty-year mortgage and cut years off your payments.

How it Works:

The Bi-Weekly Mortgage Company is an intermediary between you and your mortgage lender. They automatically debit your checking account every two weeks for half of your mortgage payment, then place your funds into a trust account. When your mortgage payment is due, your funds are withdrawn from the trust account and forwarded to your mortgage lender.

Since you are placing funds into the trust account faster than your mortgage payments are due, you eventually accumulate enough money to make an "extra" payment.

Normally, you make twelve mortgage payments a year. Since there are fifty-two weeks in a year, a bi-weekly mortgage equals 26 half-payments a year. That equals one extra payment per year. By applying that extra payment directly to the loan balance as a principal reduction, your loan amortizes more quickly, requiring fewer payments and saving you thousands of dollars.

You cannot simply mail in half a payment every two weeks to your mortgage lender, since they do not accept partial payments for legal and accounting reasons. The mortgage company would just mail your half-payment back to you.

Your Savings

On a $100,000 loan at an interest rate of eight percent, your first principal reduction would probably be a year from now. Assuming the principal reduction is equal to one monthly payment ($733.76), you would save $43,852 over the life of the loan and pay it off almost seven years early.

However, you have to deduct from those savings any amounts you paid in set-up, transaction, and maintenance fees.

Fees

There is usually a set-up fee that runs between $195 and $350, depending on how much sales commission is paid for setting up the account for you. You also pay a transaction fee with each automatic deduction and sometimes when the payment is made to your mortgage lender. There may also be a periodic "maintenance fee."

Meanwhile, whoever controls the trust account is earning interest on your money.

The Risk

Your funds, as well as the funds of everyone else enrolled in the bi-weekly program, are held in the trust account until your mortgage payment is due. If there are accounting errors, mismanagement, or even fraud, your mortgage payment may not get made. You would not be aware of any problem until after your payment is already late. Responsibility for making the payment rests with you and not the bi-weekly payment company, so you may find yourself digging into your personal savings to make the payment directly. Later you can work out the trust account problem with your bi-weekly payment company.

No-Cost Alternatives to the Bi-Weekly Mortgage

You can accomplish the same thing on your own for free. Just take your monthly payment, divide it by twelve, and add that amount to your monthly mortgage payment. Be sure to earmark it as a principal reduction.

The first way you save is that you do not have to pay any fees to anyone. It's free.

In addition to not paying fees, using the same example as above, your total savings on the mortgage would be $45,904. Plus the loan would be paid off three months sooner than with the bi-weekly mortgage. The reason you save more is because you are making a principal reduction each month, instead of waiting for funds to accumulate so that you can make one principal reduction a year.

In this internet age, you can set up your own automatic deductions including the additional principal reduction and have it go directly to your mortgage lender. The deduction occurs automatically, just like with the bi-weekly mortgages.