Huh?
Firstly, the rate is 1.05%.
Secondly, the CPI (the official US govt measure of inflation) has increased by 1.7% over the past year (12 months). In 2011 the CPI increased by 3.16%. Clearly not deflation (you are referring to the brief period of deflation that occurred 3 years ago).</p>
<p>He can always pay off the entire principal if the debt no longer makes economic sense.</p>
<p>Furthermore, inflation is projected to keep rising. That is how the Treasury, 2 days ago, sold $15 billion of inflation-protected securities with a record negative yield.</p>
<p>Don’t take out an adjustable and buy 10 year notes or 30 year bonds with the money…</p>
<p>Your upside is so small and your downside is quite large.</p>
<p>If you decide to then sell the bonds and pay off the loan, you may be a loser.</p>
<p>If both long and short term rates go up,
Your costs of the adjustable loan go up and the price of your note or
bond goes down. (you can lose by owning treasuries).</p>
<p>This idea that a person can borrow below an inflation rate and make money may not be true.</p>
<p>If I borrow the money at 1 percent and put the money in a mattress, and pay the interest with money in the mattress, and do this for 3 years, then decide to pay off the loan with the money in the mattress, what happens?</p>
<p>If inflation rises to 4 percent a year and interest rates also follow, what happens to the rates of the adjustable loan and the price of treasury bonds?</p>
<p>While there certainly is an inverse relationship between bond prices and interest rates, the Fed has already pledged to keep interest rates low for the next two years.</p>
<p>
At first glance, this example would appear to disprove my point. After all, under your example, there would be a loss.
To reiterate the reason a lender loses money if they lend at a rate lower than inflation is because the real value of the money they get back is lower than the real value of the money they paid you.</p>
<p>The distinction is that Mark Zuckerberg is buying a house, not stuffing the money in a mattress. The reason there is a loss under your example is because the real value of the money in the mattress has also declined in lockstep with the value of the debt.</p>
<p>However, the real value of a house is not subject to inflation - in fact, rising house prices is one factor in causing inflation, whereas the real value of the money stuffed in a mattress will decline with inflation.</p>
<p>Alternatives include investing the money in stocks. Presumably, like I said before, Mark Zuckerberg has access to top hedge funds.</p>
[quote]
Furthermore, inflation is projected to keep rising. That is how the Treasury, 2 days ago, sold $15 billion of inflation-protected securities with a record negative yield.
[quote]
</p>
<p>Other countries are able to sell non-inflation protected securities with negative yields. The low yields are announcing that there is deflation. The Fed is printing money and there is no nominal price inflation. No upward pressure on wages—in fact, the exact opposite.</p>
<p>“From just the loan, he is making money. It is free money, with a rate that low.”</p>
<p>No. You can lose.</p>
<p>“Investing the money he would have otherwise used to pay for the house will only make him even more money.”</p>
<p>Maybe. </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>You have price risk and inflation risk.
You can lose by investing in treasuries.</p>
<p>“While there certainly is an inverse relationship between bond prices and interest rates, the Fed has already pledged to keep interest rates low for
the next two years.”</p>
<p>You can still lose by investing in treasuries, and that includes losing during the next 2 years.</p>
<p>The reason zuckerberg get’s this loan is because he has (1) complete ability to pay it off at anytime, aka, ridiculous level of credit worthiness, and (2) he can withstand any fluctuations in interest rates because he is so very rich.</p>
<p>This is not about the rich guy getting the better deal. It would be a lousy deal for most of us because we could not take on the risk of the ARM rate going higher and we would not have the ability to simply pay off the balance of the loan if it became a pain.</p>
<p>Sigh. I get tired of people hating on other people because they have done better financially in life. When did our culture get into this whole mindset?</p>
<p>This is a mortgage loan on his primary residence, not simply an investment device. He has to live somewhere and it is going to cost him something to do so and there is value in that. If he’s paying interest only on this loan, he gets to live there for about $5,206 per month. I doubt he could rent a home like that for the same amount. If he makes more than 1.05% on $5.95mill in other investments, he comes out ahead.</p>
<p>You’re right, dstark, I didn’t read the whole thread. The headline on the Bloomberg piece led me to think it was the usual “bash the 1 percent” mindset but the actual article is fairly straightforward. So my bad.</p>
<p>That said, I really don’t think it’s smart to do an adjustable these days unless you’re a zuckerberg and paying off the loan is no biggie. </p>
<p>We had a 15 year at 3.75 and are contemplating a 7 year at 3.00. My DH is debt averse. We owned our last home and having a mortgage is driving him crazy. After doing our taxes, I’m not too big on mortgages either. They “phase out” the mortgage interest deduction pretty steeply as income increases.</p>
<p>Our older kid just hates renting and is probably going to buy something. Freaks me out.</p>
Did you read the article? What is true for other countries (Denmark, which is trying deter the flood of eurozone capital) is not necessarily true for the US. You say that there is no price inflation, when in fact the CPI has been increasing for the past 2 years. The only year the CPI dropped was 2009, and it dropped by less than 0.4%.</p>
<p>
</p>
<p>
Actually, this is true; you can lose, such as stuffing the money in a mattress. But in Mark Zuckerberg’s situation, he is putting that money in a house.</p>
<p>
Higher inflation erodes the real value of debt, making it easier to pay off the debt.
You can only lose in Treasuries if you don’t hold them to maturity and interest rates rise (the Fed, again, has pledged to keep them low).</p>
<p>Financially speaking, he’ll likely turn out to have been better off to put it under the mattress, as would have been nearly everyone who bought a house since about 2002.</p>
<p>In theory, the fed can inflate their way out of everything, but they are showing some reluctance to embrace the weimar republic monetary policies, even if they are leaning in that direction. We may get there eventually, but I think that will be a problem for the 2030’s or so. One wonders how housing prices are factored into the cpi. My suspicion is that the answer is “inaccurately”.</p>
This is not substantiated. You mention only your “suspicion” that the answer is inaccurate.
The Fed has already announced a policy of keeping interest rates low. The loan will have been paid off by 2030, no doubt.</p>
<p>It is fun to discuss this but it is also silly, because Zuckerberg can pay off this loan in an instant with a wire transfer. There is zero downside to his taking this loan, and it makes financial sense so long as the average return on the rest of his millions/billions/gazillions exceeds 1.05%.</p>