By Ike Ikokwu
Billionaire Mark Zuckerberg made news recently when he refinanced the $5.95 million mortgage on his Palo Alto, Calif., home with a 30-year adjustable-rate loan starting at 1.05 percent. The question I keep hearing folks ask is, "Why does a billionaire like Mark need a mortgage on his home? Why doesn't he just pay it off with cash?
That, my friends, is indeed the million-dollar question. The answer lies in the fact that Mark ascribes to my definition of being debt-free. While most financial gurus believe all debt is bad, I don't. I believe that there's good debt and there's bad debt. Bad debt does not increase your personal net worth nor does it provide any tax benefits. Good debt either increases your personal net worth or provides tax benefits. A mortgage is an example of good debt.
Most define debt- free as having absolutely no debt. I define debt-free as eliminating all forms of bad debt and wisely using good debt to accumulate a pool of funds that's liquid, accessible, earns a real rate of return, in your control and that can serve as collateral. With funds accumulated in this manner, you can now make the decision to pay off the good debt that you have - if you deem that to be a prudent use of your money.
What Mark is doing definitely fits this description. If you had the choice of being debt-free with $12 million in assets and $2 million in good debt or being debt-free with $2 million in assets and no debt, which would you choose? I'd choose the former and apparently so has Mark.
So what other lessons can young Mark Zuckerberg teach us? Here are a few:
• Time Value of Money Lesson: Inflation teaches us that our money is most valuable to us today. That is why taking out an interest-only loan and deferring the payment of principal owed to the bank until sometime later in the future is a prudent money lesson you should pay attention to.
• Leverage Lesson: Leverage is the use of borrowed capital to increase the potential return on investment. The less money you put into the purchase of a home, the higher your return on investment. Using "Other People's Money" (OPM) is a proven method to accumulate wealth.
• Liquidity, Use and Control (LUC Factor) Lesson: Paying cash for a house violates a very core economic and financial principle I teach my clients which is that at all times, CASH is KING. You must do everything you can in the way you manage or invest your money to make sure you maintain liquidity, use and control of your funds. To be financially successful in life, I tell my clients they'll need a lot of "LUC."
• Collateral Capacity Lesson: Having collateral capacity on where your funds are invested allows you to use "Other People's Money" to create even more wealth. This fact alone is why Mark obtained a preferential rate of 1 percent on his mortgage loan.
• The Spread or Arbitrage Profit Lesson: This refers to the amount of money that can be made on the difference between the cost of borrowing versus what can be earned on those borrowed funds. This is one way that banks make a ton of money and a very powerful money lesson for you in regards to your own money.
• Velocity of Money Lesson: This speaks to the ability to get multiple investment uses out of the same dollar. It's the equivalent of having $100,000 in two separate investments and reaping the benefits of what each investment yields.
Apply these principles to help you win the money game!
Amazon.com Best-Selling Author Ike Ikokwu, "The Financial Independence Coach," is a CPA, CFP and Registered Investment Adviser.
There are many reasons to consider downsizing your living space. Maybe you just want less house to maintain and less "junk" to look after. Perhaps your nest is empty and you just don't need all that space. Or you may be looking for a change of venue; moving to a more urban setting will likely mean a smaller home.
Whatever the reason for your move, downsizing your home and your stuff can be overwhelming to contemplate. Boston real estate sales professional Peggy Patenaude says that the best approach is to take it in steps. "The first step is to hone in on what you want," she advises. "Ask yourself what-when-where questions to get to the heart of what you really want in your new space."
Patenaude suggests you ask yourself the following:
- Consider your needs. What type of home will best suit you? A smaller house? A condominium or townhome? A retirement residence or assisted living community?
- Location, location. Where do you want to live? Is a suburban setting right for you, or are you seeking an environment closer to the attractions of a big city? Do you want to be near family? Good schools? Shopping?
- Timing. When are you hoping to move? If you don't need to make a change immediately, you can afford to take a more leisurely approach.
- Inventory. Once you decide on the where and the when, it's important to look at what is out there on the market. Peruse the ads in your targeted area and see what types of homes are available as well as pricing and the kind of space you will have.
- Go shopping. Attend open houses, book showings, pore over photos on the Internet. Take a close look at the possibilities, and the enthusiasm you generate will help you tackle the next step in downsizing.
Freddie Mac (OTC: FMCC) recently released the results of its Primary Mortgage Market Survey® (PMMS®), showing average fixed mortgage rates continuing to find new all-time record lows amid easing bond yields following June's lackluster employment report. Both the average 30-year and 15-year fixed-rate mortgage hit new lows. The average 30-year fixed has been below 4 percent for 16 weeks. The average 15-year fixed has been below 3 percent for 7 weeks.
Results showed that the 30-year fixed-rate mortgage (FRM) averaged 3.56 percent with an average 0.7 point for the week ending July 12, 2012, down from last week when it averaged 3.62 percent. Last year at this time, the 30-year FRM averaged 4.51 percent.
Additionally, the 15-year FRM this week averaged 2.86 percent with an average 0.7 point, down from last week when it averaged 2.89 percent. A year ago at this time, the 15-year FRM averaged 3.65 percent.
The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 2.74 percent this week, with an average 0.6 point, down from last week when it averaged 2.79 percent. A year ago, the 5-year ARM averaged 3.29 percent.
The 1-year Treasury-indexed ARM averaged 2.69 percent this week with an average 0.4 point, up from last week when it averaged 2.68 percent. At this time last year, the 1-year ARM averaged 2.95 percent.
"Following a lackluster employment report for June, long-term U.S. Treasury bond yields eased somewhat this week allowing fixed mortgage rates to reach yet another record low," says Frank Nothaft, vice president and chief economist, Freddie Mac. "Only 80,000 net new jobs were added to the economy last month, not enough to lower the unemployment rate from 8.2 percent. This was the concern of the Federal Reserve's monetary policy meeting held June 19-20. Minutes released from that meeting on July 11, revealed that a few members felt further monetary stimulus was needed to promote satisfactory growth in employment to meet the Committee's goal.""