By Al Barbarino
News that Facebook founder Mark Zuckerberg, 28, obtained an obscenely low mortgage rate of 1.05 percent on his $6 million Palo Alto pad left everyday homeowners with their mouths ajar.
Why, they asked, can a billionaire obtain a lower rate than everyday Jack and Jill can on their mortgages? Others asked why a billionaire — nearly 16 times over — would even need a mortgage on his home.
The answer to the latter is this: he absolutely doesn’t need a mortgage.
To put it into perspective, Zuckerberg’s home is worth roughly 0.04 percent of his total wealth of $15.6 billion. Taking the median net worth for an individual in Zuckerberg’s age range (25-34), a mere $8,525, according to data from CNN Money, an equivalent purchase equals roughly $3.41. That’s three dollars and forty one cents.
Most 28-year-olds don’t take out a mortgage loan before they buy a Starbuck’s Caffe Latte. And any individual with a net worth of $8,525 would have a tough — if not impossible — time obtaining a mortgage, much less at a 1.05 percent rate.
But Zuckerberg is able to fetch such a low rate because a billionaire poses virtually no risk to a lending institution, especially when taking out a comparatively tiny loan.
“What he borrows at is somewhat irrelative to the 99.9999 percent of the planet,” said Billy Procida, president of Procida Funding and Advisors.
There are reasons Zuckerberg may have opted for a mortgage on his new home — other than a simple desire to fit in.
First, it costs him nothing to take out the mortgage. So long as the inflation rates sticks around 1.7 percent — as it did in June, according to data from the United States Bureau of Labor Statistics — the mortgage makes more sense than storing bags of money in his closet.
But most of Zuckerberg’s money probably isn’t stashed away at all; while he may be worth $15.6 billion, much of that is tied up in stock, with restrictions on pulling funds, experts said.
“Cash is always a good thing to have, even if you are a billionaire,” Procida said.
A recent study from Environics Analytics of Toronto calculated the net worth of the average American household at $319,970. That family can certainly get a mortgage more easily than the starving, hypothetical 28-year-old with a $8,525 net worth, but still nowhere near the rates that a billionaire would.
“That family can probably get a rate between 3.5 and 3.8 percent,” said Kyle Funsch, a principal at Procida, adding that “certain banks offer better deals to high net worth individuals who keep their money within the bank.”
Another thing to note is that Zuckerberg’s mortgage is a 30-year adjustable loan, which poses greater risk than a fixed loan. Borrowing costs and rates are lower if an individual is willing to bear the risk of monthly interest rate adjustments. But it’s not recommended for your average homeowner.
“Higher net-worth individuals are more likely to take out an adjustable rate because they can react accordingly and take the bet that rates are going to stay similar to what they are now,” Funsch said.