Elon Musk took that mortgage risk. Should you?

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You probably shouldn’t follow the billionaire’s lead.

Key points

  • Elon Musk is the billionaire CEO of Tesla.
  • Musk was offered an adjustable rate mortgage at a low rate.
  • Most people should avoid adjustable rate mortgages.

Elon Musk is a well-known entrepreneur. The billionaire is best known for his role as CEO of Tesla as well as founding SpaceX.

Despite the fact that Musk has plenty of money, he has taken out several very large mortgages. Specifically, he borrowed $61 million to pay for five properties located in California.

When Musk took out his mortgages, he made a decision about what kind of loans to take out. The choice he has made is one that involves substantial financial risks. While Musk has since sold all of his homes, we can learn from his past purchases.

Musk took a big chance with his mortgages

When Musk borrowed money for his homes, he chose a specific type of mortgage called an adjustable hybrid loan. The mortgage was a 30-year loan, meaning he had three decades to pay it off. But unlike a 30-year fixed rate mortgage, the loans did not guarantee stable monthly payments.

Instead, Musk’s loans had an initial starting rate of 3.5% for the first few years. After the initial introductory period, this 3.5% rate is not guaranteed. The rate can be adjusted according to a financial index to which it is linked. As a result, if the financial index showed rates rising, Musk’s interest rate and monthly payment would both rise.

Variable rate mortgages aren’t just for wealthy entrepreneurs like Musk. Anyone can take out this type of loan when borrowing to buy a home, if they wish. But opting for an adjustable rate mortgage might not be the best idea for the average person.

Here’s why an ARM might not be an ideal choice for the typical homebuyer

Musk was able to try his luck with an adjustable hybrid mortgage since he is a billionaire. With his wealth, he could easily afford to take the risk that his rate would go up and that his payments and total borrowing costs would go up if and when that happened.

Since it wouldn’t have been a financial disaster for Musk to see his monthly payments increase, he was able to opt for an ARM that offered a lower starting rate, even though it meant there was a chance he might end up pay more over time.

It was also unlikely that Musk would find himself in a financial position where he wouldn’t be able to refinance his loan if he needed to, especially given his personal wealth and long-established borrowing relationship. with major banks, including Morgan Stanley.

The typical borrower, however, may not be as well equipped to bear the risks associated with adjustable rate loans. For the average person, if rates go up – and there’s a good chance they will – seeing a big increase in their monthly mortgage payments could lead to serious financial hardship. And the typical borrower could easily find themselves in a situation where refinancing when needed is difficult, if not impossible, as they may experience a decline in their income or the value of their property.

Ultimately, while an adjustable hybrid mortgage might have been a good financial move for Musk, those who don’t have his billions should probably opt for a 30-year fixed-rate loan that offers a guaranteed payment for the duration of the mortgage. the term of the mortgage loan. This provides certainty that payments will not change so borrowers can ensure their home purchase will be affordable over time.

A Historic Opportunity to Save Potentially Thousands of Dollars on Your Mortgage

Chances are, interest rates won’t stay at multi-decade lows much longer. That’s why it’s crucial to act today, whether you want to refinance and lower your mortgage payments or are ready to pull the trigger on buying a new home.

Ascent’s in-house mortgage expert recommends this company find a low rate – and in fact, he’s used them himself to refi (twice!). Click here to learn more and see your rate. While this does not influence our product opinions, we do receive compensation from partners whose offers appear here. We are by your side, always. See The Ascent’s full announcer disclosure here.

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