<p>Mark Zuckerberg recently got a 30 year 1% arm loan for his $7 million home in Palo Alto. I didnt even know there was a 30 year arm. I thought the max is 10 years for an arm. Did anybody get the same deal? How do I go about refinancing my mortgage to the same terms? The savings’ will help augment my kids’ college funds.</p>
<p>Show the lender that your net worth is hundreds of times the amount you want to borrow and you can negotiate similar terms, I’d guess.</p>
<p>Most ARMs are amortized over 30 years. If it’s 1%, that’s probably a teaser rate then it will float based on LIBOR.</p>
<p>Also, how can a 5 bedroom home on a 9000 sf lot possibly be worth $7M? And why would someone with a $15B net worth even take out a mortgage of such a relatively trivial amount?</p>
<p>It’s too strange for me to comprehend.</p>
<ol>
<li><p>I had a client buy a similar sized lot on a “good” street in Palo Alto, tear down the existing house, and build a house. A dozen years ago. The house he built had five bedrooms and was nice but not obviously extravagant. The whole project cost about $5 million. So I can easily believe that doing the same thing now (or buying now from someone who had done the same thing) could cost $7 million.</p></li>
<li><p>1% pretty much IS Libor right now. If his rate adjusts quarterly, it’s a significant premium to Libor. I am not at all surprised that Zuckerberg can borrow at close to Libor. His credit is pretty good, at “small” amounts like this. Ordinarily, the origination costs on a $15 million mortgage portfolio would be $300-400K, and the servicing costs $75,000/year. It didn’t cost that much to originate this mortgage, and it sure isn’t going to cost that much to service it.</p></li>
<li><p>Why would he borrow? He has a huge net worth, but not necessarily a huge amount of cash, even after the IPO, and he may think he can earn a better return than 1% by investing whatever free cash he has. Plus, he still gets to deduct mortgage interest on his taxes. So why NOT borrow to pay for the house?</p></li>
</ol>
<p>Mark Zuckerberg is a smart cookie. You can bet that this is a wise decision for him. As for a home being worth that much, that area of Palo Alto is very pricey. This home is not all that extravagant, but it’s in a great location and very close to work.</p>
<p>
After the IPO he surely has plenty of cash. If I’m doing the math correctly, a $7M house represents about one twentieth of 1% of his net worth. To me the “peace of mind” of having a free and clear home would outweigh the benefit of investing the final twentieth of one percent of my net worth in other investments. But that’s the beauty of free markets. To each his own.</p>
<p>I read he pays Libor + 80. Which is the 1%. He may have a choice of locking in Libor: pick 1 month and it rolls each month until you elect 3 months and then you elect after that, etc. That’s pretty standard in a commercial loan.</p>
<p>One way this happens is compensating balances. If you keep money in the bank, they make money off your money. That’s obviously a much bigger deal if the bank is making money from loans than it would be now but the idea remains. A number of businesses trade flowing money through accounts in exchange for better loan terms. The banks like that because they actually make more money on the money than the basis points they give up on the loan or line of credit. And it makes the customer think he’s getting a special deal.</p>
<p>The big story is that Zuck pulled his personal business from Morgan Stanley because they screwed up the IPO. That will cost MS millions over time. Good for him.</p>
<p>If Zuckerberg is keeping money in the bank and then taking the out the loan,</p>
<p>he is losing. It doesn’t matter how wealthy he is. </p>
<p>I don’t understand why businesses or people do this.</p>
<p>Unless…</p>
<p>Can people buy medium or long term cds with the loans?</p>
<p>
</p>
<p>Doubtful. There’s a $1mil maximum mortgage amount you can claim interest on, so the other $4.95 million isn’t deductible. Plus there’s a gross income phase-out starting at around $160K in AGI. So he probably gets no tax benefits at all for his mortgage interest.</p>
<p>What’s unusual about this loan is that it seems to be an interest-only ARM, which was very common at the peak but has been very difficult to obtain now that the lending rules have swung to the other extreme. The average rate for 5/1 ARMs is shown at 2.81% today on Yahoo! Finance.</p>
<p>[Zuckerberg?s</a> Loan Gives New Meaning to the 1% - Bloomberg](<a href=“Bloomberg - Are you a robot?”>Bloomberg - Are you a robot?)</p>
<p>Zuckerberg doesn’t really have a 1 percent 30 year mortgage.</p>
<p>It just sounds good.</p>
<p>Merrill just sent me a flyer offering a 25 year 1.6% apr adjustable.</p>
<p>Apparently opportunities are out there for other than MZ.</p>
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<p>Guys, you’re going about it wrong.
Mark Zuckerberg is making money off this loan. The value of Zuckerberg’s debt is being eroded by inflation, and since his interest payments are lower than inflation, the real value of the money he pays the bank back will in total be less than the value of the money the bank gave him.</p>
<p>The money he would have spent on his house can then be invested for even more money. Why take the risk of investing, you might ask? Well, even if Zuckerberg invested all of the money he saves on Treasury bonds, one of the lowest yielding and safest types of securities, he would be making more than 1.05% annualized return. With stocks, he could make anywhere between 4-8% in a normal mutual fund or index fund, or even significantly more, since he presumably has access to hedge funds.</p>
<p>Maybe…</p>
<p>Depends what happens to the money borrowed.</p>
<p>When you borrow with a variable interest rate and invest in a fixed interest rate, you have risk, so investing in treasury bonds with an adjustable rate mortgage is risky.</p>
<p>I doubt Zuckerberg is investing in treasuries with this money.</p>
<p>Zuckerberg can take a shot and use that money to invest in stocks, hedge funds, start ups, vc, pe, etc.</p>
<p>Still risky but…</p>
<p>The money is chump change for him.</p>
<p>Zuckerberg doesn’t know his net worth down to the 10 million dollar decimal point. :)</p>
<p>guys, this is a loan to one of the wealthiest people on the planet. It was done in order to give First Republic Bank another “feather in their cap”. They will bend over backwards and give unusually low interest rate loans to please high net worth clients, especially in this area. This was done for PR purposes.</p>
<p>@dstark.</p>
<p>From just the loan, he is making money. It is free money, with a rate that low.</p>
<p>Investing the money he would have otherwise used to pay for the house will only make him even more money. </p>
<p>You can’t lose money on treasury bonds. The only “risk” you speak of is the risk that the ARM rate goes up past inflation. But if the rate goes up, Mark can just pay off the entire loan at that point, having made money off the period of time in which the rate was lower than inflation.</p>
<p>^ Sounds right. Investing $7mill cash in CA residential real estate does not sound like a smart move.</p>
<p>Want are great rate? [Here’s</a> how!](<a href=“http://www.nytimes.com/2008/06/14/washington/14loans.html]Here’s”>Senators Caught in Mortgage Fallout - The New York Times)</p>
<p>Speaking of which, what ever happened to the progressive tax system? It used to be that the more you made, the higher the tax rate went up. Now, the more you make, the lower your tax rate. In terms of percentages, it seems that the more you make, the greater percentage you keep. It’s like the magic of compound interest, only in reverse.</p>
<p>terenc,</p>
<p>You’re thirty years late. THis is deflation city. 2% interest will eat you alive. you can’t earn it back.</p>