Adjustable Mortgages – A wrong option for commoners is perfect for US Billionaire Mark Zuckerberg!
According to the recent news reported by Bloomberg, Mark Zuckerberg successfully managed to refinance his mortgage with First Republic Bank in the U.S earlier this year. The Facebook founder refinanced a $5.95 Million (USD) mortgage on his home with a term of 30-years adjustable-rate loan, starting at 1.05% rate.
It is definitely a perk for Billionaire Zuckerberg, as he scored an adjustable-rate loan that started with a 1.05% rate in May.
This year the lending rate has reached a record low. The borrowing cost is comparatively lower for big shots like Zuckerberg. According to the latest report from the US Labor Department, it estimates a 1.7% inflation rate till May 2013. Although it is considered to be a modest rate, it can still pinch pockets as the US dollar is losing value much faster.
Greg McBride, a senior financial analyst with US based Bankrate Inc. opines that an adjustable-rate mortgage is easily accessible for wealthy individuals. It is a fact that high net-worth individuals can access rates far lower than the average person. Therefore, by showing his credit worthiness, Mr. Zuckerberg managed to score a lower rate.
The average US home owner may not have the luxury of enjoying the 1% interest rate option. Commoners taking out a 30-year fixed loan can get a rate of 3.56% and one year adjustable loans may not be lower than 2.69%.
The banks can increase the adjustable mortgage loan rate by leaps and bounds at any time, thereby exposing the average people to higher risks. Banks are interested in offering home loans to high-net-worth clients because they can pay off the balance of the loan faster, if required, and are considered to be low risk borrowers.
The First Republic bank pays a small percentage to attract deposits.
The rate offered by the First Republic for a three-month certificate of deposit is just 0.05%. The fund is not used for conventional lending, rather the bank can use the fund for buying U.S. Treasury bills. This definitely holds a much lower risk but provides little returns.
However, the bank can make a collateralized loan of $6 Million (USD) to someone like Mr. Zuckerberg who is worth nearly $16 Billion (USD). This helps the bank to make considerable amount money as it can raise the rates any time and profit from it.
The US based Billionaire is not required to worry about the fluctuating interest rate as he has enough money to repay his loan in full whenever he pleases. Therefore, Mr. Zuckerberg can take the advantage of the lower rates and the bank can increase the rates so as not expose itself to greater risks. As a result, both the parties can make considerable amount of money!
So, if Mark Zuckerberg can afford to take a risk with a $15.7 Billion (USD) net worth, the borrowing costs can be lower, if the borrower is ready to bear the risk of monthly interest rate adjustments.
ARMs do not currently hold much appeal for average home buyers in the USA, especially those who are required to pay mortgage rates closer to national averages.
The rates have definitely dropped to 2.69% on a one-year ARM, but it is exposed to a huge risk as the interest rates may rise from current lows during the next 30 years.
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