When you hear the phrase “second mortgage,” a negative connotation likely comes to mind.
Back in the day, the presence of an additional loan meant you had money problems.
But these days, the rich and famous are embracing mortgages, including the greats like Warren Buffett.
Instead of viewing mortgages as bad debt, the financially savvy are using them as a tool to deploy capital elsewhere for a better return.
Ironically, the less-rich seem to be fixated on paying off their low-rate mortgages ahead of schedule.
Another Mortgage for a Pair of Billionaires?
First a tiny bit of background. Beyoncé and Jay-Z bought a Bel Air mansion back in 2017 for $88 million.
At the time, they secured a $52.8-million mortgage with Goldman Sachs set at a 3.15%, presumably a 30-year fixed-rate mortgage.
This meant they came in with a 40% down payment, double the classic 20% down payment, leaving them with a 60% loan-to-value ratio (LTV).
It was a bit of a no-brainer given how cheap it was to borrow money back then. Everyone was taking out mortgages, even cash-out refinances to secure cheap money.
So despite possibly being able to afford to pay in cash, the power couple elected to put some money down and finance the rest.
Now it appears they’ve gone out and taken out a second mortgage, which as I said, sounds like something folks in financial distress might do. Or at least that’s the common implication.
At first glance, it doesn’t seem to make a lot of sense. Why would a pair of billionaires need a mortgage to buy a home, let alone a second mortgage?
That sounds crazy. Couldn’t they just buy the home with cash and move on with their life?
Why would they pay all that interest? And let’s be honest; it’s a whole lot of interest.
Beyoncé and Jay-Z took reportedly just took out a $57.75 million-dollar mortgage set at 5%.
Their very first mortgage payment includes $240,625 in interest alone. And it pays back over $69,000 in principal too.
Why on earth would they agree to pay nearly a quarter-million in mortgage interest in just a single month?
And then continue to do that month after month for the foreseeable future? That seems like a terrible way to spend a lot of money.
Well, it probably just boils down to opportunity cost.
Their Money Is Probably Better Served Elsewhere Than Trapped in Their Home
When it comes down to it, mortgage borrowing is pretty cheap. Few other loans offer such low interest rates.
And when you’re extremely wealthy, you can also secure sweetheart deals with big banks that want your other business and assets.
So this second mortgage set at 5% might be lower than what the average homeowner could obtain, especially at that super jumbo loan amount.
It’s apparently a 10-year ARM by the way, so not quite as attractive as a 30-year fixed at that rate.
But it still beats taking out a loan in the 6 or 7% range, a reality most other home buyers face today.
They can also likely pay it back at any given time, so if rates do reset higher after the 10-year fixed period, chances are they’d pay it off or get another special deal via rate and term refinance.
Either way, because the rate is a relatively low 5%, it means they can put their money (that they didn’t plonk down on the home) to use elsewhere.
For example, the S&P 500 has historically returned more than 10% per year. And nearly a 12% annualized return over the past decade.
Now if we take Beyoncé and Jay-Z’s money into account, is it better to borrow at 5% or put the money in the market for return that’s potentially double that?
I think the answer is pretty clear here. And that’s just the boring old S&P. Perhaps there are even better opportunities for their money out there.
Once you understand this, you begin to realize why the mega-rich favor mortgages over paying cash.
Even Meta founder Mark Zuckerberg has embraced mortgages in the past and I assume many other wealthy folks have too.
While mortgages do accrue interest, and the numbers can be quite large, it’s important to look at the alternatives for your cash when determining whether to prepay the mortgage or invest instead.
Sure, the amount of interest might look daunting, but if you can make more by paying back the mortgage on schedule, why wouldn’t you?
Read on: When It Makes Sense to Pay Off the Mortgage Faster
Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to begin writing about mortgages 19 years ago to help prospective (and existing) home buyers better navigate the home loan process. Follow me on X for hot takes.
