The Mega-Rich Have Mortgages, Too
Facebook founder Mark Zuckerberg is worth $53 billion, according to Forbes.
He did not pay cash for his home.
Zuckerberg and other mega-rich Americans don’t need mortgages to buy homes — so why do they have them?
Home loans come with advantages that can benefit rich people, poor people, and the rest in between.
These are the proven advantages of carrying a mortgage, even if you don’t need one.
Economists say that every investment or purchase you make comes with an opportunity cost.
Using your savings to buy a house — or making a large downpayment — means you can’t also use it to invest in stocks, buy boats or take trips. Wealthy people tend not to keep a lot of money in their checking accounts, earning virtually nothing.
They didn’t get rich by passing up opportunities to make their money work for them.
If long-term investing in the stock market nets an average of over 11 percent per year (and it does, according to MarketWatch) why would you take money out of it to buy a house.
Current mortgage rates are under four percent. You could pocket the difference.
Opportunities For Normal People
That’s where mortgages come in. By borrowing instead of paying cash, you can have your house and maintain control over your money as well.
For those who are not ultra-wealthy, the mortgage advantage remains. The typical homeowner may not have the same investment opportunities as Bill Gates (net worth: $78 billion). But opportunity cost applies to anyone with debt, too.
As of this writing, the average credit card interest rate in the U.S. is over 15 percent. So why would you use your cash to buy a home or pre-pay your mortgage balance if you’ve got credit card or other expensive debt? Use your cheap mortgage to buy your house and pay off debt with your cash.
The same logic applies when determining how much to put down on your home purchase.
It might make more sense to go with an 80/10/10 mortgage, putting ten percent downpayment and opening a line of credit for another ten percent, instead of coming up with 20% in cash.
In fact, this is a classic example of when making the “full” 20% downpayment is not in your best interests.
Assume a $100,000 home price, and $10,000 in credit card debt.
You could open a second mortgage at the following terms to buy the home at the following terms.
- 20-year payoff period
- 5% interest
- $66 per month
- $6,000 in interest paid
If you opt to make a 20% downpayment, here’s what you would pay for the credit card debt.
- 28-year payoff period
- 15% interest
- $225 per month
- $12,000 in interest paid
You don’t have to make millions to save big with a mortgage.
Regular Income Earners Get Access To More Benefits
If you make a modest income, you have more opportunities to save money with a mortgage.
Homeowners with incomes less than $250,000 could be eligible for the mortgage interest deduction.
This benefit allows many homeowners to reduce their taxable income by the amount paid in interest each year. Check with your tax advisor before filing, as this is not meant to be tax advice, but that could make your “real” mortgage payment even more affordable.
The typical homeowner can learn something else from wealthy mortgage borrowers: the benefits of an adjustable rate mortgage (ARM). Mr. Zuckerberg refinanced his mortgage a few years ago, trading in a 1.75 percent adjustable rate mortgage for a 1.0 percent ARM.
ARMs allow you to pay a lower interest rate, and when the sums involved are huge, that lower rate translates into big savings.
For example, a $2 million 3-year ARM at 2.375 percent saves the buyer $1,000 per month over a 30-year-fixed loan at 3.30 percent. During the first three years of the loan, that’s nearly forty thousand dollars.
So should you jump into an ARM? Some home buyers should seriously consider it.
But, the difference between a regular earner and the ultra-wealthy is this: if rates rise, they can pull money from another investment and retire an expensive home loan.
What To Learn From Mark Zuckerberg
You don’t have to be rich to make smart mortgage decisions. Here’s what every borrower should consider when they finance a home.
Compare your costs
Measure the cost of mortgage financing against other uses for your money.
Don’t carry expensive debt or pull out of an excellent investment opportunity to make a big downpayment, or to pay off a home. Use low mortgage rates to free up money.
Consider tax benefits
Mortgage interest is typically the biggest deduction homeowners take each year. According to online calculators, a homeowner with a $250,000 mortgage at four percent interest can save $45,000 in taxes over the life of the loan. Check with your tax advisor before filing, but carrying a mortgage could lead to big tax savings.
Prepare your exit
Have an exit strategy if you go for a riskier loan. For example, a 5-year ARM might make perfect sense if you plan to sell or refinance in five or six years.
Remove emotion from the equation
Emotion has no place in borrowing decisions. They are just numbers — evaluate them or have an accountant help you, and then choose your loan.
The rich consider mortgages just another part of their investment portfolio — a way to make or keep more money. If you want a bigger balance in your own bank account, take a cue from these savvy investors.
What Are Today’s Mortgage Rates?
Rates are low, making it a good time to take on a mortgage, even if you don’t absolutely need one.