The Tradeoff Between Mortgage Prepayments and Tax-Deferred Retirement Savings

Chicago Fed Report Substantiates Mortgage Planner Approach

The recent report released by the Federal Reserve Bank of Chicago about the benefits of tax-deferred accounts over prepaying your mortgage is evidence that the strategy of putting money into a freedom account can help homeowners reach their freedom point faster than debt acceleration.

Here are some key takeaways from the report, “The Tradeoff Between Mortgage Prepayments and Tax-Deferred Retirement Savings”:

• Survey results show that 38% of U.S. households that are accelerating their debt instead of saving it are making the wrong choice.
• For these households, reallocating their money can save them 11 to 17 cents per dollar (that’s a possible $17,000 extra for every $100,000 saved).
• This misconsumption of debt is currently costing U.S. homeowners $1.5 billion per year!

The Chicago Fed says the reason for more than one-third of all U.S. homeowners leaning toward debt acceleration rather than savings is an aversion to debt or risk.

Reading this report can directly help loan officers in several ways:

• It shows a clear reason why all LOs need to position themselves as trusted advisors and take the time to explain all of the borrowers’ options to them, ensuring that they understand which mortgage strategy is best for their current and long-term goals.
• It gives you a reason for contacting your customer—a conversation starter that opens the door and allows you to show them a better way to reach their freedom point faster (the freedom point is the point at which paying off their mortgage becomes something they do for strategic or tax benefits, rather than because they have to).
• It provides a great deliverable and value add to give to clients during their Annual Equity Review.
• It’s a great deliverable to give to new clients to impress them with your knowledge and differentiate yourself from other loan officers.

I encourage everyone to take the time to read this report, and thanks to Randy Luebke for bringing the report to our attention. I recommend you take some time to check out his website, as well.

To download the report:
http://www.chicagofed.org/publications/workingpapers/wp2006_05.pdf

To access Randy Luebke’s website:
http://www.rebiz.com

Comments

[Sean Rafferty]

Very nice and thank you both Dave and Randy for bringing this to our attention! I'm printing this out now as I type on three hole paper and will place the title page on the cover and refer to it during my seminars and consultations! Powerful!!!! Thanks again!

[John Ballentine]

Dave -

Thanks. It is always nice to get independent confirmation of what you believe in. I have had Mortgage Coach for a few months and love it. I always feel like I have a powerful tool backing me up. Personally, I wish I had know this long ago. I could have saved myself alot of trouble recently when I was trying to buy a home. The problem was my equity...it was trapped in my current home!

Thanks!

[Sean Rafferty]

Dave,

Found this a while back. Thought it was worthwhile to share it.

Highlight: 45% of American's are "at risk" of being unable to maintain their pre-retirement standard of living in retirement.

As Douglas Andrew first pointed out to me - I want my clients (and myself!) to be in the SAME tax bracket or HIGHER when I retire!

The sad reality is that the overwhelming majority of American's don't experience that and won't when they retire.

[Sean Rafferty]

Forgot to paste!

http://www.bc.edu/centers/crr/nrri.shtml

Also some other really great writings and a cool downloadable game (well, the concept is cool, I haven't played it yet!)