There’s a reason Beyoncé, Meghan Markle and Chrissy Teigen all make payments on their sprawling properties. If you can finance a house with a mortgage, you should, says Lauren Anastasio, certified financial planner at SoFi, a personal finance company. “While the wealthy may have the wherewithal to buy real estate outright, the ability to finance a home gives you leverage. In other words, they have the ability to borrow money and invest the cash they held onto with the expectation that the investment will earn more than the cost of the loan,” she says.
An example: Let’s say that [insert celebrity couple here] buys a home for $8 million. They pay cash for half of it, then take out a $4 million-dollar mortgage—aka they could be borrowing $4 million at an ideal time with a low interest rate (for instance, currently, interest rates are 3 percent). From there, they have a certain amount of time to pay it back (most commonly for mortgages, the time span is 30 years). So, in the meantime, that $4 million cash they held onto can be invested elsewhere in things like additional real estate properties, private ventures, the stock market, etc. “It’s more than reasonable to expect that investing in the stock market could return on average 7 percent,” Anastasio explains. “If it only costs 3 percent to borrow the money, your fave celeb couple is able to net 4 percent per year on that $4 million.”
Back to why this is better than paying in cash: Leveraged investing is a good idea because it frees up that money you didn’t spend on your house for other purposes. And that’s not all: There are potential tax benefits associated with mortgage loans. In the right circumstances, a wealthy homeowner can deduct the interest paid on their mortgage in a given year up to a loan amount of $750,000, which further increases the value of the inexpensive mortgage debt, Anastasio adds.