Mortgage repayment yields big returns Chicago Daily Herald
One consequence of the financial crisis has been to make investment in mortgage repayment increasingly attractive. Mortgage repayment is a riskless investment that yields a return equal to the interest rate on the repaid loan. If the loan carries a 6.125 percent rate, the borrower earns that rate on the balance repaid. The yield on other investments of comparable risk, including federal government securities, CDs and money market funds, are way down. My money market funds today are yielding barely more than 1 percent.
Not so obvious but even more compelling, some borrowers in the process of refinancing can earn a much higher return on partial loan repayment if the balance reduction allows them to reduce or avoid mortgage insurance coverage. The return is high because the crisis has increased mortgage insurance premiums. Here is an example from my mailbox.
Q. My credit is excellent; my income is adequate; my rate is 6.125 percent; and I qualify for 5.125 percent, except for one thing: The value of my house has declined from $360,000 to $280,000 and we owe $242,000. My lender says that for us to refinance we need mortgage insurance, which was not required when we took out the loan originally. I don't want to pay for mortgage insurance.
