Pay mortgage early? Ask questions first

Q: We just bought a new home and took out a mortgage of $250,000. It's a 30-year fixed mortgage and our interest rate is 6.25 percent. We decided not to escrow taxes and insurance, so our monthly payment of principal and interest is $1,539.29.

We have been receiving letters from a company offering an "equity enhancement program." The program seems like a great way to save interest and pay our mortgage off early in a relatively painless fashion. Instead of making our full payment every month we would make half of the payment every two weeks or one-quarter of the payment weekly. The company will automatically deduct this from our checking account.

The illustration they sent shows that participation in this program will save us more than $67,577.00 in interest and our mortgage will be paid off almost six years early.

There is a one-time enrollment of $295 and if the biweekly payment is selected, a fee of $3.50 is charged for each payment. If the weekly payment is selected, a fee of $1.95 is charged to process each payment.

We are leaning toward signing up and would like to ask if the weekly or biweekly plan is better.

A: If your goal is to pay off your mortgage early, these programs simplify the process but you will pay unnecessary fees.

Before you decide to pay more toward your mortgage, evaluate what other financial goals to which this extra money could be directed. The interest rate on your mortgage is pretty low and may provide you with a tax deduction.

Before deciding to pay more on your mortgage, make sure it doesn't make more sense to fund Roth IRAs, increase other retirement savings, start an education plan or pay off other debt with higher nondeductible interest.

If you decide that paying off your mortgage is your best financial move, you can accomplish the same savings by either making one additional payment a year or adding a small amount to your monthly payment. When you make the additional payments, note that this amount is to be applied to your principal. There is no need to pay an enrollment fee (which is normally nonrefundable and taken out of your first payment) or transaction fees.

There isn't anything magic about the program you have been offered. If you make biweekly payments of half of your mortgage, you will make 26 payments a year. If you were to pay half of your mortgage twice a month you would only make 24 payments a year. Two extra payments of half your mortgage equal one extra full payment per year.

Many people find it hard to plan to have enough extra cash on hand each year for an extra full payment, which is why the biweekly payments are more appealing. Most mortgage companies will only draft your account biweekly or accept biweekly payments if you sign up for this type of program.

An easy way to save the same amount of interest and pay off your mortgage early while avoiding the unnecessary fees is to make an additional payment toward principal each month. You will save more than $2,500 if you make adjustments to your payments on your own rather than enrolling in the program.

For example: The monthly principal and interest payment on a 30-year loan of $250,000 at 6.25 percent is $1,539.29. Total interest paid on the loan at maturity would be $304,148. If you were to add 1/12 of your principal and interest payment to your total monthly payment (1,539.29 + 128.27 = 1,667.56) with the instructions that the extra amount be applied to principal, your total interest paid over the life of the loan would be less than $237,000.

This small monthly addition to your payment would save you more than $67,148 in interest and your loan would be paid off in less than 25 years.