For many people, the only way to afford a home is to finance it with a mortgage and pay off that loan over time. This especially holds true today given how home prices have increased through the years.
During the second quarter of 2014, the median U.S. home sale price was 288,000, according to Federal Reserve data. Ten years later by the second quarter of 2024, that number climbed to $412,300.
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Given that median annual wages were just under $60,000 during this year’s second quarter, it’s easy to see why the typical working American can barely afford a down payment on a home today, let alone the entire cost in one fell swoop.
But uber wealthy folks are in a different position. Those with billions of dollars to their name can buy a home outright rather than take out a loan. Yet celebrities like Mark Zuckerberg, Elon Musk and Jay-Z have all made headlines for taking out multimillion-dollar mortgages — not out of necessity but to reap a couple of key benefits.
It allows for better cash flow
Someone who’s a billionaire a couple or several times over may not have to worry so much about cash flow. But borrowing for a home allows them to hang onto their cash for other purposes.
Remember, unlike stocks, which can be bought and sold in an instant, homes are a highly illiquid investment. So rather than tying up hundreds of thousands of dollars or more in a home, the wealthy might instead keep their money readily available and simply make payments they can easily afford on a loan.
Since mortgage interest is tax deductible on the first $750,000 of a loan, there’s still a nice tax write-off to be had on itemized tax returns while seizing the opportunity to make your money work harder for you in the meantime.
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It frees up more money to invest
The average fixed mortgage rate as of September 13, 2024 is 6.20% for a 30-year loan. But during periods when borrowing rates are lower, it can make a lot of financial sense to finance a home, pay interest on a mortgage, and invest the money that mortgage frees up in stocks and other assets.
The stock market’s historical average annual return, for example, is about 10%. But that return isn’t guaranteed, and for investors with average stock-related knowledge, it may be more realistic to plan on a 7% or 8% annual return over time.
Right now, there’s not such a big gap between the average 30-year mortgage rate and a reasonable investment return in the stock market. But when mortgage rates are averaging 4% or 5%, it can be more beneficial to put a minimal amount of money into a home and invest the rest. For example, it’s better to pay 5% interest on a $500,000 mortgage if that $500,000 is able to earn 8% or more in a stock portfolio while you pay the loan off slowly.
It’s easy to see why people who can afford to pay cash for homes sign mortgages instead. But even if you’re not raking in seven or eight figures, you can enjoy the same benefits of taking out a mortgage — increased cash flow, a tax deduction on interest, and the ability to put the rest of your money to work in the stock market.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
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