Dfnkt, your post has some things that make me want to comment.
1) Using your numbers, $40k mortgage, $285 monthly payments, 30 years means you have a 7.69% interest rate. I wanted to point that out, since you talk about a 5.5% interest rate in your post.
The average 30 year mortgage interest rate is 6.45%. The only way you could possibly get close to 5.5% interest now is with a very short term ARM (which is almost always a very stupid financial move). For example, a 1-year ARM is going at 5.84% for the first year, and probably around 8% for 29 years.
2) Using your numbers, you'd pay off 20% of the mortgage in 161 months. With PMI costs, that would be 161*$60 = $9660. You are paying $9660 simply because you couldn't save up $8000 measly dollars for the 20% downpayment! If you can't save up $8000, why do you think you can afford to pay $9660 for PMI?
3) You are correct that you can pay off a mortgage sooner with bi-weekly payments. But I do want to clarify two points. Point (1): two bi-weekly payments of half a monthly payment is NOT the same as one monthly payment. Remember, there will be many months where you have to pay three bi-weekly payments. Let me put that in numbers. Suppose your monthly payment is $400. Half of that amount is $200. Suppose you pay that every other Friday. In August 2007, you could pay it on Friday the 3rd, Friday the 17th, and Friday the 31st. So in August 2007, you paid 3*$200 = $600. Notice how this is far more than paying the standard $400 in August. Many people don't realize that they have to come up with three bi-weekly payments in many months and don't plan for it properly. It is those 3rd payments in those months that cause you to pay off the mortgage earlier. Point (2): Rather than pay someone to set up a bi-monthly plan for you, just have a standard monthly plan and pay an extra $200 whenever you can. You'd be far better off this way in most cases. You have more flexibility and you aren't charged fees for this feature as it is free with all monthly payment mortgages (most bi-weekly plans have additional fees).
4) If you bought that house in August 2007, and if you make a payment in August, you'd pay $1280 in interest this year. You'd also pay 5*$60 = $300 in PMI. Total tax deductable payments = $1580. Now lets look at your IRS income tax form. Standard deduction for a married couple = $10,300. Your probable itemized deductions: $1580 (plus whatever state taxes you paid which is probably only a couple grand). BZZT. You get no tax benefits this year because your itemized deductions are under $10,300. That is, unless you have massive medical bills or a massive other mortgage that brings your itemized deduction above $10,300.
Small/cheap houses don't charge enough interest to get a tax deduction. And even if you did get a tax benefit, you ONLY get the benefits from the portion that is over $10,300. Sorry to break the news to you, but your house won't save you a penny on your taxes unless you have some really unusual conditions that you didn't post about.
The house mortgage deduction typically only helps people with a remaining mortgage balance of ~$100k to ~$1M. Thus, it is a tax deduction mainly for the upper middle class/lower wealthy class. It doesn't help the poor (no home), lower middle class (too cheap of a home), or the really wealthy (they just buy a home outright and don't borrow money for it).