This risky mortgage made sense for Mark Zuckerberg – but you should probably stay away
When Mark Zuckerberg bought his house, he took out a mortgage with an interest rate of 1.75%. He then refinanced a loan with a rate of only 1.05%.
Most people won’t be able to get such a low loan rate. But Zuckerberg’s wealth, coupled with the type of mortgage that he took, enabled him to obtain such an affordable rate.
Although the typical borrower cannot obtain a rate of 1%, he has the possibility of taking out the same type loan that the Facebook founder qualified for. And, like Zuckerberg, the typical borrower can usually get a lower rate by choosing this type of loan.
Unfortunately, while it may have made sense for Zuckerberg to opt to borrow using this particular type of mortgage, most people should steer clear.
This is the type of loan that Mark Zuckerberg took out
One of the main reasons Zuckerberg was able to get such a low rate on his loan is that his mortgage is a adjustable rate mortgage. This means that its low initial rate is only guaranteed for a certain limited period of time.
After an initial introductory period, the rate of his loan will no longer be blocked at 1.05%. Instead, it is tied to a financial index. The particular loan he took out was tied to LIBOR, which stands for London Interbank Offered Rate. LIBOR was a widely used index to which many mortgage lenders linked loans, although it is being phased out.
It’s a bad idea for most borrowers to opt for an ARM
Variable rate mortgages often come with low introductory rates, but not as low as the rate offered by Zuckerberg. They do this to entice customers to opt for an adjustable mortgage rather than a fixed rate loan.
However, the problem is that they also come with a lot of uncertainty. Since it is impossible to predict how interest rates will change over time, consumers who take out variable rate mortgages will not know in advance the amount of their mortgage payments or the total cost of their loan. over time.
For the founder of Facebook, this is not a big problem. Zuckerberg’s mortgage won’t become unaffordable for him no matter how high rates go, since he has a fortune. And he’s unlikely to face a situation where he won’t be able to refinance his variable rate mortgage due to a drop in income or a reduction in his credit rating.
For the typical person, however, there is a very real risk that payments on an ARM will increase enough to become a financial burden. This could create a seizure risk. And those who take out ARMs with a refinance plan before their rate begins to adjust could find themselves facing circumstances that prevent them from qualifying for a new loan when they need it.
For all of these reasons, most borrowers should choose fixed rate loans that offer regular, guaranteed monthly payments and just say no to the variable rate mortgage that Zuckerberg chose to take on.
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