Why Do Rich People Take Out Loans?
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Why do the wealthy take out loans?
The answer is simple and includes three parts.
First, even if you have a lot of money, you might not want to lock up of your cash in home equity. Even if you live in the house, you might not want to have it all tied up in a house since you can’t directly access that cash if it’s locked up.
The only way to access the money is by taking out a loan against the home equity, or selling the house and enjoying the gains. That is, assuming there are gains of course.
Second, wealth people will take out loans to enjoy the liquidity of the cash. Maybe 10-20% or even 50% will go into a down payment but a loan might be used for the rest since that cash can be used as a safety net or to invest. I’ll explain that in a minute. Just consider that having a loan gives you leverage. You could take some of the remaining 50-90% of cash you did not put into the house, and invest it into a vacation home for example. You’ve got more options when you have cash.
Third, as I mentioned above, you can enjoy better returns on your money. For example, if you put $500,000 down on a $1,000,000 home, you have a $500,000 loan. Now, if you’re rich, maybe you could just pay that off. However, if the loan is something like 4%, then compare that to a stock like AT&T that often pays a 5% dividend. And, it’s “liquid” meaning you can pretty easily sell AT&T if you desperately need cash. And, in it might even go up in value so you might enjoy the dividend and a capital gain if you’re patient, and your timing is reasonable.
In short, if you don’t put all your money into home equity, you have many options with the cash that’s not locked up. You can even beat the interest rate, so that the dividends from a moderate stock portfolio could actually pay part of the mortgage over time. Or, you could just pocket the dividends and pay down the loan in other ways. Many options if that money isn’t locked up, see?
NOTE: Not all “rich people” will take out loans even if they are drowning in cash. That is to say, many wealthy people absolutely hate debt and will always pay 100% cash. They never want any debt, even “cheap” house debt. They don’t mind locking up cash into home equity and feel more safe and secure that way. It’s a psychological factor to consider. It’s also about risk tolerance, which is likewise connected to psychology.
Now, how about you? Time to make money with a “side hustle” and grow, grow, grow, right? Freelance, grow a business, get rich, and come back and let us know how you feel about all this.
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ATTENTION! 100% FREE – New 16-page PDF Download
“10 Ways to Make $10 in 10 Minutes”
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This might be of interest to you?
If You Can’t Afford A House, Don’t Buy One (Dave Ramsey)
OK, you’re turn…
Time to make money with a “side hustle” and then buy your dream home. 🙂
