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Dr. Don Taylor, CFA, Bankrate.com advice columnistBiweekly mortgage vs. extra yearly payment

Dear Dr. Don,
Do biweekly mortgage payments save more money than just paying an extra payment each year? Does it save money or not? -- Dan Deduce

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Dear Dan,
The magic in a biweekly mortgage payment is that you wind up making the equivalent of 13 monthly mortgage payments in a year. It has virtually nothing to do with the fact that you're making a payment every two weeks.

A biweekly payment plan often charges an additional fee for the privilege and typically just aggregates your payments to make the regular monthly payment on your mortgage.

It's common for these plans to directly debit your bank account, so you don't have to worry about the extra postage expense, but it still doesn't make economic sense if you have to pay a fee.

If you're paid biweekly, you'll have two, three-paycheck months every year. Use those checks to make additional principal payments on your mortgage that are equal to a full month's payment, and you'll end up at the same place without all the hassle.

You can compare the two for yourself. Use Bankrate's mortgage payment calculator to see the effect of making additional principal payments, in both interest savings and in how much time it will cut off your loan. Use the biweekly mortgage calculator to look at biweekly payments. You'll see there's not much difference.

I'll always lean toward not making the additional principal payments contractually, as they would be with a biweekly mortgage. It takes a little more financial discipline to make the additional payments voluntarily, but the resulting financial flexibility can be really useful if you find yourself facing some unexpected expenses.

To ask a question of Dr. Don, go to the "Ask the Experts" page, and select one of these topics: "financing a home," "saving & investing" or "money."

Bankrate.com's corrections policy -- Posted: July 31, 2006
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