Rich People Love Mortgages May 9, 2006
You’ve seen all the media attention about how mortgage rates are rising and homeowners are either locking in rates before they go up or refinancing mortgages from adjustible to a fixed rate. A quick check of mortgages shows that a standard 30 year fixed rate is only 8 basis points (0.08%) higher than last month’s rate.
But with mortgage rates around 6.19%, someone in the top 35% tax bracket would be paying closer to 4% on the borrowed money. The very rich are more comfortable with debt and they seek out loans for things they could pay for outright. Interest Only loans used to be for wealthy clients who will invest the savings on the difference between an interest-only mortgage and an amortizing mortgage, and who is confident that the investments will make money and beat the 4% they pay on the mortgage.
The reasons for taking on more debt range from buying artwork, yachts, airplanes, or investing in funds. A very rich person may easily be able to pay $20million cash for art but the opportunity cost of selling something else and paying tax on it is far higher than borrowing money from their private banker. As for mortgages, with the tax deductions they can take up to the $1million cap, the wealthy can make up the interest rate they pay by investing in taxable securities by leverage their real estate holdings.
Sources:
(mortgage chart courtesy of Bankrate.com, as of 5/9/06)
- Posted in : Debt, Real Estate
- Author : Kyle
Comments»
Up in scotland, the smoking ban has been on for two months now and I must say its about time.