By Jack Hough
Mark Zuckerberg uses an adjustable-rate mortgage. Should you? Probably not.
When the billionaire Facebook founder refinanced his mortgage with First Republic Bank earlier this year, he scored an adjustable-rate loan that started with a 1.05% rate in May, according to Bloomberg. The rate resets monthly and is equal to the London Interbank Offered Rate, or Libor, plus 0.8 percentage points. The one-month Libor rate was recently 0.25%.
By one measure, the loan is so cheap that Mr. Zuckerberg is making money on it. The inflation rate was 1.7% over the year through May, according to the Labor Department. That’s a modest rate by historical standards, but nonetheless, it’s high enough to suggest that the dollars Mr. Zuckerberg owes are losing value faster than his loan is accruing interest.
A one-month adjustable-rate mortgage is a niche product available only to the wealthy, says Greg McBride, a senior financial analyst at Bankrate.com. But one-year ARMs are common enough that rates for them are tracked by mortgage specialist Freddie Mac. The latest rate is 2.69% — safely above the inflation rate.
So how did Mr. Zuckerberg score such a low rate? By posing near-zero credit risk. First Republic currently pays little to attract deposits. It latest published rate for a three-month certificate of deposit is just 0.05%. With funds that it doesn’t use for conventional lending, it can invest with negligible credit risk by buying, say, U.S. Treasury bills. But three-month ones recently paid just 0.06%.
For Treasury-like safety with a much higher return, the bank can instead make a collateralized loan of just under $6 million to someone who is worth nearly $16 billion, which is what it did. Mr. Zuckerberg may be making money on his loan after inflation, but so is First Republic, considering how cheaply it can raise money from its depositors.
For homebuyers who would have to pay mortgage rates closer to national averages, ARMs don’t hold much appeal at the moment. Their rates have fallen more slowly of late than those of fixed-rate mortgages. The 30-year fixed mortgage rate recently averaged a record low of 3.56%, down nearly a full percentage point from 4.51% a year ago. That 2.69% rate on a one-year ARM, meanwhile, has fallen by only around one-quarter of a percentage point, from 2.95% a year ago.
Also, ARMs save borrowers less cash than they have in the past. The difference between the one-year ARM rate and the 30-year fixed rate is just 0.87 percentage points. Over the past 20 years, it has averaged 1.61 percentage points.
That’s a minimal savings compared with the added risk of a rise in interest rates from current lows during the next 30 years. The only kind of borrower who doesn’t have to worry about such a thing is one who has enough money to pay his loan in full whenever he pleases. It also helps if he, like Mr. Zuckerberg, can negotiate a rate that is safely below the inflation rate. Those who are borrowing because they need the money, meanwhile, should stick with fixed rates.