THE LURE OF FREE MONEY
In July of 2012, Mark Zuckerberg financed his 5.95 million dollar Palo Alto home, that’s 3 miles away from Facebook’s headquarters with a 30-year mortgage.
THE INTRIGUE OF LOW-INTEREST RATES
At that time he was 28 years old and the world’s 40th-wealthiest person, worth an estimated $15.6 billion. The question is, why would you get into debt when you have billions of dollars and can easily afford it?
THE MATHEMATICS OF BORROWING
If he wanted, he could easily buy a dozen $6 million homes, in cash, without batting an eye. So why get a mortgage? The answer is long and complicated but in short, it’s – Free Money!
PLAYING THE INTEREST RATE GAME
Sounds ridiculous, who would give you free money when you are already a billionaire? Let me explain, It all has to do with interest rates. The inflation rate in the US is 2.5 to 3 percent, so any money you borrow that is below the inflation rate is considered free money.
LEVERAGING THE RISK
Zuckerburgers mortgage rate is just a little over 1.05 percent but it is adjustable, meaning that, based on the circumstances the rate could possibly go up for one reason or another. If you do the math, the bank is the loser since the mortgage rate is below the inflation.
THE WEALTHY GAME OF BORROWING
You don’t have to be a genius to do the math. For the sake of example, let’s say you borrow 1 million dollars at a rate of 1 percent. The average rate of return on the savings account is 2.4 percent.
OPPORTUNITY COST AND BUSINESS SAVVY
This means that even if you deposit that million dollars in another bank, you end up making $24,000 dollars a year while you only have to make a monthly payment of $10,500 to the bank that lent you that money.
Imagine if you do that with a hundred million dollars, or how about a billion dollars! When you can borrow for free, there’s no point in tying up your own money when you can use that money for more profitable things.
SMART FINANCIAL MOVES
Of course, when we are talking about small amounts of money, this might not make sense because the difference isn’t that big, however, when it comes to large sums, playing around with 1, 2 or half a percent could potentially mean dozens of thousands of dollars if not hundreds.
BUSINESS STRATEGIES OF THE RICH
Let’s say you are a businessman, and you can easily afford a million-dollar house, why buy a house when you can finance it for 1 or 2 percent while you invest the rest of that money in your business that could potentially get you 10, 20 if not 30 percent returns.
Even if you are too lazy to find a more profitable way to use money, just throwing it all into an index fund can be much more profitable. Especially when we are talking about 20 or 30 years. Historically, an index fund has shown to have an average return of 8 percent.
THE RICH AND MORTGAGES
If you take a mortgage and invest your money in an index fund, the percentage difference will end up in your pocket. It all comes down to Opportunity cost.
SMART MOVES OF THE ULTRA-RICH
Economically, it wouldn’t make sense for Zuckerberg to buy the house in cash when he has been offered a 1 percent mortgage rate. But he is not the only one who is so smart to do that.
THE ELITE AND LOW RATES
Take Elon Musk, for example. Most of his wealth is tied to Tesla and SpaceX. To buy a house for 20 million dollars, he probably might need to sell a considerable chunk of his wealth, pay taxes, and incur other expenses. However, he can take free money and keep his monthly payment under his budget.
PRACTICING WEALTH STRATEGIES
He took out a 61 million dollar mortgage for 5 properties in California with a monthly payment of 180 thousand dollars. That’s not unique to billionaires, it’s also practiced by moderately rich people like Jay Z and Beyoncé.
They took a mortgage to buy their 88 million-dollar house. They put 40 percent downpayment and financed the other 52.8 million dollars. That leaves the couple with a 149,600 dollars monthly payment.
FINANCIAL SAVVY OF THE WEALTHY
In comparison, the national median home value is $200,700. Instead of tying 53 million dollars in a house, he definitely knows where to invest it, to maximize his profit. At the end of the day, He has made a lot of great investments, and he is on his way to becoming a billionaire.
RICHES AND INTEREST RATES
The richer you get, the better ways to find to make more money. But let’s be honest, not everyone gets such a low mortgage rate, nationwide it’s around 3 percent, but even at that rate, it still doesn’t make sense to purchase a house if you can finance it.
THE PRIVILEGE OF THE BILLIONAIRES
But let’s get this clear first! Why do the super-rich get a lower rate than the rest of the country? First of all, when you are a billionaire, the bank can sleep calmly because no one is worried that you might default on your loan, and in case something happens, you can easily sell part of your business to pay back your mortgage, that takes the risk out of the equation.
BUILDING CREDIT AND TRUST
Compare that to an average employee who could get sick and not be able to work or just lose his job. Secondly, paying your mortgage on time every month helps you build and maintain a healthy credit score, so when you are in trouble next time, with a strong credit score, it will be much easier to borrow money from the banks. You are basically building trust between you and the financial institutions.
STRATEGIC LENDING AND RELATIONSHIPS
But it could also be the other way around. Banks do offer such a low mortgage rate to establish a strong relationship with rich people so that when their companies need a loan from a bank, they would come to them and not their competitors. It’s a win-win situation.
THE SAFETY OF ADJUSTABLE RATES
But these low mortgage rates are adjustable which means as I said earlier, they could go up! But no one is worried because if it stops making sense economically to these ultra-rich people, they easily can pay back their mortgages.
THE STIGMA OF DEBT
But most people associate debt with something negative because we usually borrow money that we can’t afford for entertainment and end up paying a lot more back. In fact, right after getting out of college, you realize what a burden your student debt is already.
DEBT: THE GOOD AND THE BAD
And once you calculate how many years you have to pay back that debt, you immediately create a perception that- DEBT