In October, I purchased my first home. That, of course, means that I started making mortgage payments. Fun!

Within a month or so of obtaining the mortgage, I received something in the mail about biweekly payments. The letter claimed that I could make a payment every other week – automatically debited from my checking account for my convenience – instead of making one monthly payment.

The net result (and the reason I would want to do this) is that I could pay off the mortgage about five years early and save thousands in interest. I looked over the paperwork and was confused. Switching from one payment a month to two payments couldn’t conceivably whittle down the principal that fast, even if it would save me a few pennies on the interest accumulated over half a month.

I was going to call and inquire, but I forgot about it. Then, today, I was browsing the GMAC Mortgage website and I saw a similar advertisement. I checked out the online offer, and I found some fine print to clear up exactly how this program would magically pay my mortgage off sooner.

Biweekly Payments = More Payments

The trick is basically that you end up making an extra mortgage payment over the course of the year.

With the bi-weekly system, you pay half of your normal monthly mortgage payment every other week. That means you’re making half a payment 26 times throughout the year – the equivalent of 13 full payments. In other words, if my old mortgage payment was $1500/month I’m simply paying an extra $1500/year to pay down the principal.

From the GMAC fine print:

One-half of your monthly mortgage payment would be deducted every other week, on the same day of the week, for a total of 26 withdrawals per year. This results in one additional mortgage payment, applied directly to your principal each year, to accelerate the equity growth in your home.

Does this wonderful service come free of charge? Of course not.

I don’t know how much the original offer would have charged, but I did find the costs as advertised through GMAC Mortgage. The program involves a $295 “enrollment fee” and a $5.42 monthly fee (about $65/year).

While these aren’t exorbitant fees by any means, they are entirely unnecessary.

GMAC Mortgage – like virtually every mortgage company on the face of the earth – allows you to add any amount to your monthly payment. Any amount that you include over and above your normal payment (Principal + Interest + Escrow) is used to pay down the principal.

To achieve the same results as the “Biweekly Payments” plan, add a one-time payment equal to your monthly payment to your final mortgage payment for the year.  If you have a monthly payment of $1200, not counting any applicable escrow, add $1200 to your December mortgage payment. That amount is based on a $200,000 loan, 30 year term, and 6.00% interest rate.

By adding an annual payment of $1,200 as principal curtailment, you’ll cut short the life of your loan by five years. You can use a mortgage calculator, like this one from bankrate, to play around with the figures. Over the course of those 25 years, you’d be handing $295 + 300 * $5.42 (almost $2,000) to your mortgage company.

It seems silly to pay them for something you can do absolutely free.

Don’t want to make a big payment at the end of the year? Add 1/12th of your monthly payment to each payment. You can split it up how you like, but the bottom line is principal curtailment is the only way to pay off your mortgage early. You don’t need to sign up for a special program and pay any fees to pay down your principal as you go.

These bi-weekly plans (and everything like it) are just another way for the mortgage company to milk you for cash.