Cash out the old, bring in the new lower payment mortgage?

In a recent post by WSJ.com they suggest that people actually cash out their old mortgage at the higher rate and end up in better position.  This was a great strategy that I first learned about with Dave Ramsey and the Financial Peace University class.  It was the idea that NOT paying interest to the bank was suspiciously like earning a return on your money.  That's the case with the WSJ.com example:

Should You Invest Your Cash in a Refinance

Until recently, few homeowners were "underwater" on their mortgage, meaning they owe more on it than their house it is worth. Now millions of people are in that situation. But that doesn't mean they can't refinance—it simply means they must pay down the principal of their loan with cash.

Because that concept is relatively new, few online calculators help people run the numbers for themselves. Here, Jack Guttentag, professor emeritus of finance at the Wharton School and self-styled "Mortgage Professor," calculates the potential return on a hypothetical deal. He considers only the cash used to retire the mortgage; closing costs would affect results as well. And he assumes a five-year period because that's a typical length of time people hold a mortgage. (The returns are similar over 15 years, he says.)

In general, the rate of the return is larger when there is less cash required, or when there is a greater difference between the old and new mortgage rates.

• Current loan balance: $809,000
  (on a 30-year fixed mortgage at 6%)
• Current monthly payment: $6,398
• Cash paid at closing to retire current loan:$80,000
• New loan terms: $729,000, 15-year fixed mortgage at 4.375%
• New monthly payment: $5,530
• Monthly payment savings: $868 per month
• Return on the $80,000 investment: 10.4%annually for five years.*

*Includes both the principal paid down on the new, shorter-term loan and the monthly savings in loan payments.

Source: Jack Guttentag,www.mtgprofessor.com