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(making it similar to a biweekly mortgage)

A biweekly mortgage has a "half-payment" every other week. Since there are 52 weeks and a day (approximately) in a year, thsi works out to 52/2 or 26 "half-payments" in a year, or the equivalent of 13 "full payments" in one year. (There would be two months out of the year when you would make 3 "half payments".)

If you add 1/12th to each payment (e.g., pay $1,083.33/mo instead of $1,000/mo), you would get the equivalent benefit as a biweekly mortgage: it would shrink the duration of the mortgage by about the same amount and save you about the same amount of total interest (nominally), but without having to send any extra mailings to the mortgage company. Actually, one of the Foolish caclulators (FOOL home page -> "Personal finance", then scroll down to "Calculators") will allow you to plug in your mortgage parameters, a desired pay-off period, and it will compute what the monthly payments would have to be to be paid off in that time, and the amount of interest you would save by paying off that mortgage early. (The calculator assumes a fixed-rate mortgage.)

Before increasing your payments, check your note (mortgage contract) to make sure you won't run afoul of a "prepay penalty". (When I was shopping for mortgages, I took a look at a few mortgage products on eLoan that had prepay penalties and the wording was such that such minor increase in payments wouldn't trigger any penalty. However, different notes can have different terms.) Also, check how the "additional principal pay-down" should be paid--some payment coupons have a spot for additional principal pay-down, but different loan servicers may want different ways of indicating this if it isn't on the payment coupon.

As far as sending half-payments twice a month, there are a few issues that may trip you up:

1. If less than the contracted amount is received, it may be interpreted as a partial payment and trigger an underpayment penalty, and you don't want to follow the exercise just to be hit with additional penalties.

2. The interest part of the mortgage may end up being computed only once a month, so payments received anywhere within the monthly period (say the 15th through the 14th of the next month) would have the same effect in two payments as it did as just one payment. (This is unlike typical credit card interest that is computed on average daily balance, where the sooner the money is received, the less interest one ends up paying.) So, to really reduce interest payments, more money has to be received in that monthly period than the contracted (minimum) payment amount.

3. Even where the semimonthly payments would help, the amount saved will probably be small when looked at over the 30 years--probably a few cents more than the postage one would be paying to send in the extra payments.

4. Unless a human checks the payment carefully, if you have an escrow account with the loan servicer, extra payments may end up feeding the escrow account instead of paying down the loan balance.

The offers to put you on a biweekly mortgage aren't doing you any favor in most cases--by charging a "setup fee" and a "payment processing fee", they are earning money doing what you could do for yourself "for free" just by adding to your monthly payments.

By the way, more often than not when I see someone who suddenly thinks biweekly payments sounds great (Turn your 30-year mortgage into a 23.5-year mortgage and save TENS OF THOUSANDS OF DOLLARS OF INTEREST!), they use "biweekly" and "semimonthly" synominously, which is not the case. There is no magic involved other than the magic of paying more money on the loan to pay down the loan quicker. The earlier in the mortgage this is done, the more dramatic effect it will have on the total interest paid.

-- calculators --

How will paying extra each month affect the total interst and duration of the mortgage?

I have a loan balance of a certain amount and a certain rate. What will I have to pay per month to get it paid off in a specified number of years?

These sites have a lot of financial calculators that may also help if you are interested:
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