Your lender offers a bi-weekly mortgage payment plan, where every two weeks you make a payment that equals half of your normal monthly payment. The catch here is that as there are fifty-two weeks in a year, you'll make twenty-six bi-weekly payments, or thirteen full payments each year. More than you would make by sending the lender traditional monthly payments.

The profit: That extra payment reduces the principal balance of the loan, the balance that every future interest calculation is based on. As you drive down the principal, you drive down the total interest paid and the length of time it takes to pay the loan.

The Payment Process
Your lender won't accept half payments mailed in twice each month. Instead, they'll set up a plan to deduct the payment from a bank account every other week. Lenders usually offer no-cost or very low cost debit plans.

Should you Involve A Third Party?
If your lender does not offer a bi-weekly program, there are intermediary companies that will set up a plan for you. They debit your account every other week and send a monthly payment to your lender, for a fee. Once each year they'll make your extra payment.

Why you should not involve third party?

--There's no reason to pay a fee for something you can do on your own using another method.

-- What if the intermediary becomes insolvent and doesn't make your payments? Don't let anyone tell you that can't happen.

-- What if poor bookkeeping skills result in late payments? Your lender won't care that it "wasn't your fault." It's your responsibility make payments on time, even if someone else is mailing them for you.

-- Why allow a third party to hold your money in trust, earning interest from the deposit?

It's usually better to personally manage a debt as important as your home loan.

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Comparing Repayment Plans
Let's look at a mortgage with a principal balance of $150,000, a term of 360 months, and an interest rate of 6%.

Bi-Weekly Option

Bi-Weekly Payment = $449.67
Total Interest During Life of Loan = $135,294
The loan is paid off in 24 years instead of 30.

Principal Comparisons

Most of us won't live in a single house for thirty years, so it makes more sense to look at shorter term savings than the long term payoff.

The first figure shows the loan's principal balance at the end of each year of monthly payments. The second figure shows how much principal remains at the end of each year of bi-weekly payments.

Year 1
$148,157 vs. $147,198 (Difference of $959)

Year 2
$146,202 vs. $144,224 (Difference of $1978)

Year 3
$144,126 vs. $141,066 (Difference of $3060)

Year 4
$141,922 vs. $137,715 (Difference of $4207)

Year 5
$139,581 vs. $134,157 (Difference of $5424)

Year 6
$137,097 vs. $130,380 (Difference of $6717)

Year 7
$134,459 vs. $126,371 (Savings of $8088 to date)

Alternative Way to Pay It Off Faster

A bi-weekly plan forces us to stay on track with additional mortgage payments, but it's not the solution for everyone who wants to reduce their loan principal more quickly.

One alternative is to divide your yearly payment by twelve and add that figure to each monthly payment, designating it as a payment toward's the principal balance. Your payment coupon may have a blank line for that purpose. If not, call customer service and ask how to make payments towards the principal.

An Example

For the loan in the previous scenario, you would divide $899 by twelve to find the extra amount to include with your payment, $75.

Your principal balance would equal the following amounts at the end of each year shown. The numbers in parentheses represent the balance due at the same time for someone on a bi-weekly plan.

Year 1, $147,232 ($147,198)
Year 2, $144,294 ($144,224)
Year 3, $141,175 ($141,066)
Year 4, $137,864 ($137,715)
Year 5, $134,348 ($134,157)
Year 6, $130,616 ($130,380)
Year 7, $126,653 ($126,371)

Okay, what happens to your balance if you make a lump sum payment of $1,000 once per year, eleven months into your payments for each year:

Year 1, $147,152
Year 2, $144,130
Year 3, $140,921
Year 4, $137,514
Year 5, $133,897
Year 6, $130,057
Year 7, $125,979

So no matter how you do it, making an extra payment, or more, each year can significantly reduce the amount of interest you'll pay on your home loan.