Paying your mortgage on the bi-weekly payment plan can certainly save you a huge amount of money and get your house paid off early, but for the plan to work, you need to understand how and why it works and you need to make sure that your lender doesn't have any stated policies that neutralize the bi-weekly plan.

Why does paying bi-weekly help? Two reasons: The bi-weekly plan makes more frequent reductions in your principal balance which avoids a lot of interents charges and the bi-weekly plan includes an extra payment per year. Every time you make a mortgage payment, the amount of accrued interest at that point in time comes off the top and the remainder of your payment goes to reduce the principal. Then, until your next payment, interest accrues on the balance after that payment.

Now, if instead of making your standard $1,000 payment, you start paying $500 every two weeks, you pay off the accrued interest more frequently and make more frequet principal reductions, WHICH REDUCES THE AMOUNT OF INTEREST THAT ACCRUES. And that is the key of the interest advantage of the bi-weekly payment plan. You make a half payment every two weeks and interest accrues on a slightly lower amount than if you would have paid monthly, with interest building up for a full 30 days bewteen payments.

The other key to the bi-weekly payment program is the fact that payments are made bi-weekly, not twice per month. There is a very important difference. This means that you make 26 half payments per year because there will be two months in the year that have 3 two week periods in them. Those two extra half payments give you your extra payment per year.

Roughly, if you have a 30 year mortgage, if you start the bi-weekly program from the beginning of the note, you will pay off in about 20 years. That's 10 years of interest avoided just by using the bi-weekly program.

Now, it is extremely important to understand that for the program to work, you absolutely must have your payments posted every 14 days. Not twice a month, not on the 1st and the 15th, but on a clockwork, two week schedule from the day that interest starts accruing on the loan. The only practical way to make sure the payment schedule is followed is to set up the payments on electronic draft. Also, and just as imortant, make sure your lender does not have language in the fine print of the mortgage note that prohibits the bi-weekly plan. Some lenders do and some don't, but the bottom line is that you have to find this out up front.

The program can work if one understands why and how and follows the schedule.

Learn more about this author, Seth Callen.
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