Zuckerberg's 1 percent mortgage: Why does a billionaire need a loan?

Mark Zuckerberg just  refinanced his Palo Alto home with a 30-year, 1.05 percent adjustable mortgage rate. Why do billionaires like Zuckerberg take out home loans, when they could easily buy their properties outright?

No matter who you are, if you qualify for a home loan, you’re going to get an historically low interest rate on your mortgage in the current market.

But unless you’re a billionaire, it won’t be as low as Mark Zuckerberg’s.

In addition to getting married and taking his company public, the Facebook CEO capped  off a busy summer by refinancing the mortgage on his house, Bloomberg reported Monday. The Palo Alto, Calif., home three miles from Facebook headquarters cost $5.95 million, and Mr. Zuckerberg financed it with a 30-year adjustable mortgage loan, with a rate of 1.05 percent, less than half the national average. 

At 28, Zuckerberg is the world’s 40^th -wealthiest person, worth an estimated $15.6 billion. If he wanted, he could buy a dozen  $6 million homes, in cash, without batting an eye. So why get a mortgage?

Because it costs him absolutely nothing. “When you can borrow at an interest rate that’s below the rate of inflation you’re essentially borrowing for free,” says Greg McBride, senior analyst at Bankrate.com. a Florida-based firm that tracks interest rates on mortgages, auto loans, and credit cards, among others. “When you can borrow for free, there’s no sense in tying up your own money, when you can use that money for more profitable things.”

To put Zuckerberg’s low rate into perspective, the average interest rate for a 30-year jumbo mortgage that can adjust after one year is 2.76 percent, according to Bankrate.com. A 30-year fixed-rate mortgage hit 3.56 percent Monday – another record in a summer of record lows, and the lowest level since the start of long-term mortgages in the 1950s, according to the Associated Press. 

So how did the Zuck land such a low rate? For one, his mortgage is adjustable, meaning the interest rate could go up. These types of loans generally have lower interest, but are reserved for buyers who pose virtually no risk to the lender (a billionaire probably won’t default on a payment).

“This is not a product reserved for celebrities," Mr. McBride says. "They aren’t necessarily billionaires. We’re talking about people who are millionaires, at least – corporate executives, wealthy people.”

“These people aren’t taking a loan because it’s the only way they can afford that house,” he adds. An adjustable rate mortgage "is not a mainstream product.”

Should the interest rates skyrocket, or become too high for holding a mortgage, Zuckerberg and his ilk can easily buy their homes outright, leaving the mortgage behind with no repercussions.

Many are decrying the preferential rates given to the wealthy as yet another example of how the richest Americans stay that way, pointing out that Zuckerberg’s 1 percent loan lends a whole new meaning to the complaints about the “1 percent” of wealthy Americans  underlying the Occupy Wall Street protests last year.

But while the rest of us 99 percenters may not have access to a 1 percent mortgage, home loans are at least not the financial trap they were five years ago.

“The subprime mortgage market [in which lenders dealt out high interest loans to risky, often low-income borrowers who couldn’t make their payments] are virtually nonexistent,” says McBride.  That's “not to say 9 percent interest rates don’t exist. But 95 percent of mortgages now are government-backed loans, which come with very attractive interest rates. And those are only available to creditworthy borrowers.”