- Despite being a billionaire, Mark Zuckerberg borrowed money to purchase a home.
- Sometimes it pays to borrow money if it’s at a low enough interest rate.
You may be surprised to find the Facebook CEO borrowed money to buy a home.
Mark Zuckerberg, the billionaire co-founder and CEO of Facebook, is one of the wealthiest people in the world. While his net worth is now estimated to exceed $80 billion, Zuckerberg did not pay cash when purchasing his home -- even though he obviously could have afforded to do so.
Why would such a wealthy person borrow to buy a house? The reason is simple and easy to understand.
Here's why Mark Zuckerberg took out a home loan
Zuckerberg reportedly financed his California home with a 30-year mortgage. This is a common type of home loan, although Zuckerberg opted for an adjustable-rate mortgage (ARM) while fixed-rate loans are more common.
Zuckerberg also qualified for a low mortgage rate of 1.05%. This is well below what most people are offered. He was able to qualify for such a competitive rate because he opted for an ARM and because his wealth allowed him to get a preferential rate.
So, why did Zuckerberg opt to borrow instead of paying cash? It's because mortgages are low-rate debt -- especially in his case -- and there's little reason to incur the opportunity costs associated with tying up money in a property when it is so affordable to borrow.
The Facebook CEO won't pay much interest on his loan. And, because of inflation, paying off his debt will get cheaper over time. If you have a set monthly mortgage payment and the money you use to pay it is worth a little bit less each year as the price of goods and services rise, then you are repaying your loan with money that couldn't buy as much as when you originally borrowed. As a result, it gets easier and cheaper to pay your loan each year.
Mortgage debt is also affordable to repay because interest is tax deductible on loans up to $750,000 for those who itemize when filing their taxes (as opposed to claiming the standard deduction). While Zuckerberg borrowed more than this amount, he is still likely able to deduct part of his mortgage interest, so that helps to reduce the cost of borrowing further. Many people who buy homes stay below this limit, so they get a government subsidy that defrays the cost of the interest they're paying on their entire home loan.
Finally, Zuckerberg can likely invest his money in assets that provide higher returns. If you can earn a higher rate of return with safe investments than the rate offered by a mortgage lender, it usually makes sense to invest your money instead of using it to pay cash for a home.
Following Zuckerberg's example makes sense
These billionaires made a smart choice when borrowing, and most homeowners should follow their lead.
The typical homeowner won't get the rate Zuckerberg was offered, but they should still be able to borrow affordably. And most home buyers should opt for a fixed-rate loan, rather than an adjustable one. But the bottom line is, paying cash for a home isn't a given when a home loan is available at a reasonable rate.
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