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Posted: 1:15 p.m. Tuesday, Jan. 28, 2014

Set up your own accelerated mortgage plan

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Have you received an offer in your mailbox promising that you could save $10,000, $20,000 or even $30,000 on your mortgage by getting set up on a bi-weekly payment plan? It sounds appealing, but there's a much smarter way to approach bi-weekly payments.

Banks team up with appointed marketing companies to send out these solicitations and to collect bi-weekly mortgage payments. Very often there's a charge of $200-$400 to set you up on a bi-weekly payment plan. The marketing company may also charge a few dollars each time you make a bi-weekly payment, which is half of your monthly payment every 2 weeks. (The bank gets a split of all profits.)

Now, on the upside, the math behind this idea works. Pre-paying a mortgage early in a 30 or 15 year cycle pays off handsomely down the road. By paying bi-weekly, you'll make the equivalent of 26 half-payments in a year. At the end of year, the marketing company (on behalf of your bank) makes 1 additional payment toward your mortgage. So the end result is that you pay 13 months in a 12-month period.

But there are several problems here. What if the marketing company messes up the payment, then who is delinquent? (You are.) And because the marketing company only pays out once on your behalf each year, they and the bank held some of your money all year long and get rich off the interest, instead of paying down your mortgage steadily every 2 weeks.

So what should you do instead of letting someone else set you up on a bi-weekly payment plan? Keep making monthly mortgage payments and add one-twelfth extra in the additional principal box on your monthly coupon. For example, if your monthly payment is $1,200, pay $1,300 instead. That way you'll do for free what your bank wants to charge you for -- and you'll bring your principal down much quicker.

In general, it is to your advantage to prepay a mortgage -- unless your interest rate is below 5% like it has been for those who refinanced in recent years. If you have a 3% or 4% mortgage, you should take your sweet time paying it off over the full term of the loan!

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