insight
工程技術，地產投資，信仰家園，時尚生活
When the popular singer-songwriter Ne Yo purchased his second home in Milton, Georgia last week, speculation abounded as to why he would purchase a second home so close to his first home in Alpharetta. But nobody seemed to care about how he financed the purchase. Likewise, nobody seemed to care when Ellen DeGeneres purchased Brad Pitt’s home late last year.
This week, however, when Facebook founder Mark Zuckerberg refinanced the mortgage on his Palo Alto estate, the news made headlines instantly in publications from tabloids to investment magazines, begging the question, why?
Though it’s certainly unexpected for the world’s 40th wealthiest man in the world to finance his purchase instead of paying for the home outright, one could argue that such an event is hardly newsworthy. And yet, there are several things that Zuckerberg’s decision tells ‘normal’ consumers about today’s economy and real estate market.
Here are some things to think about:
Adjustable rate mortgages are not for everyone – Zuckerberg opted for a one-month adjustable rate mortgage (ARM) which is currently set at 1.05% on a 30 year loan. This is a financial product generally reserved for wealthy borrowers. More available for mainstream borrowers are one year ARMs whose rates are tracked by Freddie Mac, and are now hovering at 2.69%, a rate that is safely above the rate of inflation. It is important to note that the interest rates on one year ARMs has fallen slower than that of fixed-rate mortgages.
Because Mr. Zuckerberg poses no risk of default, the lending bank was able to offer him a rate that would essentially allow him to make money on the loan. Nevertheless, since most borrowers pose more of a credit risk, they aren’t eligible for these terms, and should not seriously consider an ARM even if Mr. Zuckerberg set such an example, if only because the rates could theoretically skyrocket at any point, posing serious financial problems for mainstream borrowers, while Zuckerberg and other wealthy people could opt to pay for their homes outright in order to avoid paying higher interest rates.
Today’s low interest rates are still worth pursuing – In today’s tough economy many conservative consumers are pushing off their home purchase, but perhaps they shouldn’t. With average interest rates on a 30 year fixed mortgages hitting 3.56%, the lowest rate since the 1950s, borrowers should consider the advantages of borrowing more money while the rates are reasonable and investing any surplus funds into a financial product that will yield more than the interest rate.
If possible, consider this strategy as an alternative to purchasing a home when the economy stabilizes and interest rates will undoubtedly be higher.
It’s a good idea to shop around – What’s striking about Mr. Zuckerberg’s loan is not only that he has one now, when rates are low, it’s that he’s refinancing, which indicates that he had a mortgage previously but is taking advantage of today’s low rates. This should serve as a lesson to all homeowners and potential homeowners. If you have a mortgage at rate that is substantially higher than today’s interest rate, investigate the refinance opportunities available.
While you may not be eligible for rates comparable to what Mark Zuckerberg received, you may still be able to enjoy a substantial monthly saving or to reduce the term of your loan. Likewise, if you’re considering a home purchase at this time, make sure to look at all your options and to find a mortgage that has necessarily the lowest interest rate, but the best terms for your budget and lifestyle.
Although we can learn some things from Mr. Zuckerberg’s shrewd financial plan, when it comes to personal finance, what’s good for the goose is not necessarily good for the gander. In fact, it’s rarely wise to make financial decisions based on what other people are doing, even if the ‘other’ people are as wise as Mr. Zuckerberg is purported to be. Instead, smart consumers should explore their options thoroughly and consult with an educated mortgage advisor before committing to a long-term loan.
By John Gittelsohn & Dakin Campbell - Jul 16, 2012
Billionaire Mark Zuckerberg is giving new meaning to the term “the one percent.”
The Facebook Inc. (FB) founder refinanced a $5.95 million mortgage on his Palo Alto, California, home with a 30-year adjustable-rate loan starting at 1.05 percent, according to public records for the property.
Vegetation covers the front of Facebook Inc.'s Chief Executive Officer Mark Zuckerberg's house in Palo Alto. Photographer: Noah Berger/Bloomberg
July 16 (Bloomberg) -- Billionaire Mark Zuckerberg is giving new meaning to the term “the one percent.” The Facebook Inc. founder refinanced a $5.95 million mortgage on his Palo Alto, California, home with a 30-year adjustable-rate loan starting at 1.05 percent, according to public records for the property. Michael McKee reports on Bloomberg Television's "Money Moves." (Source: Bloomberg)
Mark Zuckerberg, chief executive officer and founder of Facebook Inc., during the Allen & Co. Media and Technology Conference in Sun Valley, Idaho, on July 12, 2012. Photographer: David Paul Morris/Bloomberg
A second story window is seen from behind trees at Facebook Inc.'s founder Mark Zuckerberg's house in Palo Alto. Photographer: Noah Berger/Bloomberg
Facebook Inc.'s founder Mark Zuckerberg's house in Palo Alto. Photographer: Noah Berger/Bloomberg
While almost all lending rates have reached historical lows this year, the borrowing costs available to high-net-worth individuals are even lower if the person is willing to bear the risk of monthly interest rate adjustments, said Greg McBride, senior financial analyst with Bankrate Inc., a North Palm Beach, Florida-based firm that tracks interest rates. Large increases are unlikely anytime soon with the Federal Reserve signaling it will keep interest rates near zero for at least two years.
“When you can borrow at a rate below inflation, you’re borrowing for free,” McBride said in an e-mail. “This is the concept of using other people’s money and it preserves financial flexibility for the borrower.”
“The one percent” is a phrase popularized last year by the Occupy Wall Street movement to protest growing U.S. income inequality. The top one percent of Americans earns a fifth of the country’s income and controls more than a third of its wealth, according to Joseph E. Stiglitz, a Nobel Prize-winning economist, whose book “The Price of Inequality,” was published last month.
The average rate on a one-year adjustable mortgage was 2.69 percent on July 12, up from a record low 2.68 percent a week earlier, according to Freddie Mac, the McLean, Virginia-based mortgage-finance company. The average rate for a 30-year fixed loan fell to a record low 3.56 percent on July 12. Freddie Mac doesn’t survey rates for loans that adjust monthly.
World’s Wealthiest
Zuckerberg, 28, is the world’s 40th wealthiest person, with a net worth of $15.7 billion, according to the Bloomberg Billionaires Index. His company went public in a $16 billion initial public offering in May. The shares were down 19 percent since trading began as of July 13.
Facebook spokesman Larry Yu declined to comment on Zuckerberg’s mortgage.
“We’re not going to get into the personal finances of executives,” he said in an e-mail.
The Palo Alto house cost $7 million in March of last year, purchased in the name of a limited liability company, according to a deed filed with the Santa Clara County Clerk-Recorder.
Zuckerberg’s address was published by Palo Alto Online and Burbed.com, a Silicon Valley real estate blog. Three neighbors reached by phone at their homes said Zuckerberg lives at the address. They asked that their names not be used because of concerns for their privacy.
Page, Jobs
The five-bedroom, 5-1/2-bath house was built in 1903 on a 9,011 square-foot (837 square-meter) lot, according to Redfin Corp. The two-floor white wood-sided home is ensconced behind a gated drive and a wall of groomed shrubbery, about three miles (4.8 kilometers) from Stanford University and three miles from Facebook’s Menlo Park headquarters. Zuckerberg was married to Priscilla Chan in the backyard on May 19.
Homes in Zuckerberg’s ZIP code, 94301, sold for a median $1.875 million, or $968 a square foot, in June, up 1.7 percent from a year earlier, according to Redfin. Google Inc. co-founder Larry Page owns a home in 94301 and the late Apple Inc. founder Steve Jobs also lived there.
‘Huge Run up’
“There was a huge run up before the Facebook IPO and it cooled off after the Facebook fizzle,” Ken DeLeon, a Palo Alto real estate broker, said about local home prices.
First Republic Bank (FRC), which provided Zuckerberg’s mortgage, doesn’t comment on specific loans or clients, said Greg Berardi, a spokesman for the San Francisco-based company.
“First Republic, like most banks, prices its credit products based on the strength and totality of the entire client relationship,” he said in an e-mailed statement. “This is our approach with all of our clients.”
The bank’s high-net-worth customers include Stephen Ross, the chairman of developer Related Cos.; Peter Thiel, the chairman of hedge fund Clarium Capital LLC and an early Facebook investor; and former New York Police Chief William Bratton, the current chairman of Kroll Inc., according to First Republic’s website.
Wealthy individuals who have a lot of business with a bank may be eligible for the best rates, said Rob Kricena, a regional managing director at Wells Fargo Private Bank, which has technology entrepreneurs as clients in the San Francisco Bay area.
Favorable Terms
“In our experience the majority of high-net-worth individuals do have a mortgage,” he said. In many cases, they can get favorable terms because of their wealth.
Zuckerberg’s 30-year mortgage started with an initial rate in May of 1.05 percent, which also is the minimum rate for the loan, according to a document filed with the Santa Clara County Clerk-Recorder’s Office. It adjusts each month starting in June with interest payments calculated as the London Interbank Offered Rate, or Libor, plus 0.8 percentage point. The maximum rate cannot exceed 9.95 percent.
Monthly principal and interest mortgage payments on the $5.95 million loan would start at $19,275.
The Fed has kept its main interest rate at zero to 0.25 percent since December 2008 and has said it will probably keep rates “exceptionally low” at least through late 2014. The central bank last month extended a program called Operation Twist aimed at lowering long-term interest rates by swapping shorter-term securities with the same amount of longer-term debt.
Morgan Stanley
Zuckerberg’s latest mortgage replaces an adjustable-rate loan from Morgan Stanley (MS) recorded in June 2011 that started with a 1.75 percent rate, which would’ve had a monthly payment of $21,256. Zuckerberg got the loan at the same time Morgan Stanley was seeking to lead manage Facebook’s initial public offering, which it won earlier this year.
Christine Pollak, a spokeswoman for New York-based Morgan Stanley, declined to comment.
The mortgages were signed by Tom Van Loben Sels, a partner at Apercen Partners LLC, a Palo Alto tax consulting firm for high net worth clients. Van Loben Sels didn’t reply to a phone message seeking comment.
Banks like to provide home loans to high-net-worth clients because they can pay off the loan quickly, if needed, and are better credit risks, said Sandi Bragar, director of planning at San Francisco wealth manager Aspiriant. Her firm recommends variable, interest-only loans in many cases because of the tax deductibility of mortgage-debt payments and the adjustable rate, which places the rate risk on the borrower and generally makes the loan cheaper, she said.
Low-Cost Debt
Wealthy individuals often choose to finance a home purchase rather than pay cash because of the overall low cost of mortgage debt and the additional access to liquidity, Kricena said. In many cases, they invest excess cash that they would have used to purchase the home into higher-yielding assets, he said.
“Even if someone would be able to pay off that mortgage with cash or other assets, they don’t want to tie up their holdings in real estate because they may have access to other types of more attractive investments,” he said.
Still, in the current environment of tight underwriting, it can be difficult to navigate the process for even the wealthiest borrowers, Bragar said in a phone interview.
“Getting a mortgage these days is very tricky even for the wealthiest,” she said. “They are by no means exempt.”
DeLeon, the Palo Alto real estate broker, said adjustable rates below 2 percent have become common for high-net-worth borrowers. He has handled about 65 sales worth $120 million this year in the area.
“I have a 1.8 percent rate and I’m not too special,” he said in a telephone interview. “A lot of my tech clients are doing it. Those rates exist for clients who don’t need a mortgage. I tell them to enjoy the free money and pay it off when the rates spike up.”
To contact the reporters on this story: John Gittelsohn in Los Angeles at johngitt@bloomberg.net; Dakin Campbell in San Francisco at dcampbell27@bloomberg.net
