Paying down the house

David Ader, in the February 13th issue of Barrons, wrote that a record 50 percent of all refinancings in the fourth quarter of 2010 resulted in smaller loans than the previous mortgage. [Source]

This can be attributed to three factors: 1.) people had to meet loan-to-value requirements on reduced home values, 2.) aging baby boomers who are paying down their houses to conserve their wealth, and 3.) there just isn't a more risk averse investment opportunity with the same "return."

As Ader explains, a 30-year Treasury offers a return of 3.2%. Compare that with paying a lump sum on your mortgage, which effecting "earns" you a 5 percent return. I felt pretty smart when I read this, as I'd come to the same realization earlier this year.

While deployed (and for 90 days afterward), the Army's Savings Deposit Program offers depositors a 10% return on up to $10,000. Having returned from my deployment in November, I had to withdraw my SDP money in February. The wife and I decided to apply that money to our mortgage.

In addition to a higher proportion of our payment applied to principal, we got two other benefits. First, it allowed us to cancel the private mortgage insurance, which was costing us $22.50 a month. Second, having paid down the principal by a significant amount, we are now allowed to recast within this next year.

This will become key when we move next and rent out the house. Hopefully by recasting we'll be able to charge a more competitive rent while still getting positive cash flows.