While there are great advantages to buying a house with cash, sometimes the benefits of using other people’s money outweigh those advantages. While debt is often rightly characterized as bad for one’s personal finances, there are situations in which it can be less bad.
If you can qualify for a mortgage that starts out at 1.05%, you ought to take advantage of the opportunity.
There’s risk, of course. The low interest rate could be higher when the rate adjusts in three or five years, but if the same conditions that allowed you to qualify for that rate continue, you’ll most likely be treated as favorably when the time for adjustment arrives.
Unfortunately, you probably won’t be able to qualify for an interest rate that low, even on an adjustable-rate mortgage, unless you’re Mark Zuckerberg, literally. The founder and CEO of Facebook just refinanced his mortgage on his $6 million home in Palo Alto, California with First Republic Bank, and was offered a rate of 1.05% to do so.
Unless you have some special qualities, adjustable-rate mortgages operate more like bait and switch. As I’ve seen in the past, up-front interest rates sounds great, and are useful in encouraging customers to consider expensive refinancing, where banks make money today from refinancing fees and later when the teaser rates expire. Average consumers are hit with a major increase in monthly mortgage payments when the rates are recalculated. The rules are different for Mark Zuckerberg.
With the net worth and notoriety the rock star CEO has achieved, he doesn’t need to shop around for mortgages. Banks want his business and are willing to offer favorable terms in order to compete for Zuckerberg’s attention. First Republic Bank doesn’t need to earn money on this mortgage. Just the news that they offered this rate to the CEO of Facebook will give them enough press that other wealthy individuals are likely to seek out this bank’s services.
A loan with an interest rate of 1.05% is practically free money. If you have the opportunity to borrow someone else’s money at that rate in order to finance an investment that has a great chance of beating that rate in terms of income or appreciation, it only makes sense to do it. Mark Zuckerberg’s mansion qualifies in that category. As long as he retains his reputation, his name on the roster of past owners likely increases the property’s value without any help from improvements or market appreciation.
If you want the same advantages Mark Zuckerberg receives, you may want to consider some of these tips. Zuckerberg meets at least some of these conditions.
1. Be an executive or founder at a major corporation. If you can succeed in business without really trying as well as Mark Zuckerberg did by starting a dating website in his college dorm and growing it into one of the biggest companies in the world, banks will be crawling to you on their hands and knees for your business. They’ll want to underwrite your company’s IPO. They’ll want to offer you, personally, products reserved for the elite of the elite.
2. Have a sky-high net worth. In 2009, Mark Zuckerberg’s wealth dropped below $1 billion according to Forbes. He was out of the club, but he showed the world the following year with a net worth of $4 billion. The 2012 list of the richest Americans has not yet been released, but estimates would put his net worth around $16 billion this year, following Facebook’s public stock offering. You don’t have to have $16 billion ready to invest in order to receive preferential treatment from the finance industry. In most cases, $1 billion would be enough — perhaps not enough for a mortgage rate around 1%, but enough for select products.
3. Remain loyal. Banks, in an effort to generate more profit from each well-off customer, reward loyalty. The best terms are reserved for the “best” customers. This is true even at the smaller scale. Even Vanguard, an investment bank for everyman, offers significant discounts for those who invest over a certain amount in their mutual funds. The best expense ratios are reserved for this company’s Admiral Shares. If you have the capability of spending more with a bank, they will offer whatever is possible to encourage loyalty, and then reward that loyalty.
4. Be in the news. If everything you do is being watched by the public, companies will move mountains to work with you. Being identified with a celebrity in the press brings with it free public relations. Mobile Resource Card saw a potential in the Kardashian family when it released a co-branded prepaid debit card. The product was widely panned, and I called it possibly the worst financial product of the year thanks to its fees. The Kardashians, however, were likely paid very well for the association of their brand with the product — at least they would have been if they didn’t later speak out against the card.
If, however, you’re in the news for something more noteworthy than reality television, and if you have a strong reputation, the products you’ll be able to align yourself with will be of a higher quality. Whether these come in the form of spokesperson opportunities or just great terms on products you need, your celebrity status will be a great asset. The asset, however, will be as fleeting as your positive image. Break a few securities laws, murder your spouse, or intentionally damage the environment in an unpopular way, and the preferential treatment will disappear in an instant.
Perhaps you, too, will qualify for a 1% APR adjustable-rate mortgage, assuming you offer the same benefits to the bank as Mark Zuckerberg does.
Published or updated July 30, 2012.