3 Reasons Even Rich People Get Mortgages
by Maurie Backman | Published on Aug. 24, 2021
Financing a home purchase can make a lot of sense -- even if you have a lot of money.
In today's housing market, you'll hear lots of stories about people losing out on homes to all-cash offers. If you've landed in that situation, you may be bemoaning the fact that you're not wealthy enough to purchase a home without taking out a mortgage to finance it. But actually, getting a mortgage makes a lot of financial sense, so much so that even rich people like to take advantage of them. Here are a few reasons why wealthy people finance their homes -- even if they can afford to buy them outright.
1. They like flexibility
Real estate is a fairly illiquid investment. This means that converting a house to a pile of cash isn't something that happens quickly. You need to list the home, find a buyer, and wait for that transaction to close, which could take weeks, if not months.
Stocks, on the other hand, are a more liquid investment because they can be sold at a moment's notice, at which point you can get cash for them right away. And it's this very reason that wealthy people opt to get mortgages.
You may have a buyer who can afford to purchase a home for $1 million in cash. But what happens if that person then needs to use some of that money, whether for an unplanned expense or another investment opportunity? At that point, their money could be tied up for a long time. On the other hand, if a wealthy person puts $200,000 down on a $1 million home and finances the rest, they would still have access to $800,000.
2. Borrowing can be cheap
In the past, there have been periods when mortgage rates have risen. But in recent years, mortgage rates have been very attractive -- especially over the past year. And when mortgage rates are low, it pays to borrow money for a home purchase and invest the funds not being pumped into a home at a higher return.
That's precisely what wealthy people tend to do. Right now, it's possible to snag a 30-year fixed mortgage at 3.1%. By contrast, investing in stocks might generate an average yearly 7% return. (That figure is actually a few percentage points below the market's average.) To put it another way, it makes sense to spend a little over 3% a year on interest to make 7%.
3. Mortgages offer tax benefits
Taxes can eat away at wealthy people's earnings, so the rich are generally eager to find ways to minimize their IRS burden. And mortgages fit that bill. The interest you pay on a mortgage is tax deductible, and that, combined with other tax breaks, helps wealthy people keep more of their money for themselves.
It pays to get a mortgage
If you're an average home buyer, you probably can't afford to purchase a home outright, especially with property values being so inflated right now. But even if you could afford to buy a home in cash, it wouldn't necessarily make sense. There are many benefits to taking out a mortgage, especially when interest rates are as low as they are today, so if you're feeling bad about having to finance a home purchase, just remember that rich people do the same thing all the time.
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