Oct 7, 2024
When it came to creating her Fantasy* home Mariah Carey did what it took to Make it Happen.
In 1999, the Grammy-award-winning songwriter, producer and actress purchased a Tribeca penthouse and the apartment below it, merging the two to create a Beautiful abode currently worth an estimated $30 to $35 million.
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Carey clearly had some strong Emotions when it came to buying the perfect property because she didn't spare any expense. In fact, she's taken out multiple loans on the home over time and currently owes an estimated $18.6 million in mortgage debt, according the Daily Mail
It all raises the question: why didn't she say that all she wanted for Christmas was a big check to pay it off?
The reality, though, is while taking out such a big loan may be A No-No for many, it likely wasn't a Heartbreaker for Carey. In fact, many financial experts are saying I Still Believe Carey was smart to borrow despite her large loan balance.
So how can having so much debt be a good move? Here's why Carey and many other wealthy people choose to borrow for a property rather than paying for it outright and fully owning The Roof over their heads.
All she wants for her money is a better ROI
There's a very simple reason Carey was right to take out a mortgage rather than tying up millions of dollars of cash in her home. She can get a far better return on investment elsewhere.
Mortgage loans tend to be one of the most affordable types of debt available. The current average interest rate on home loans is 6.09%, but before the post-pandemic era sent rates surging due to inflation, mortgages have typically been available at a rate of around 3% to 5% for most of the past decade.
For those who itemize on their taxes, mortgage interest is also tax-deductible on loans up to $750,000, or loans up to $1 million if you borrowed before Dec. 16, 2017. This offsets interest costs. Plus, with fixed-rate loans, payments don't change so the loan effectively gets cheaper each year due to inflation as it's paid off with money that has less buying power.
Thanks to all these factors, it's pretty easy to earn a higher rate by investing in a reasonably safe investment like the S&P 500. By taking out a mortgage and investing her money instead of tying it up in her home, Carey will likely end up richer in the end.
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Carey likely did the math and, with better investments saying I'll BeThere to earn you a higher ROI, she decided she'd be better off borrowing and using her money elsewhere.
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Can a mortgage lender be your hero?
If you aren't a pop superstar, you may be wondering what this has to do with you. Here's why it matters. If you understand the opportunity cost of tying up too much money in your home, you can make better choices with your own money.
Say that you're deciding between a 15-year and 30-year mortgage. You'll likely find that you're better off with a 30-year loan even if it may not seem like it on the surface.
If you're borrowing $300,000 to buy a home and could qualify for a 30-year loan at 6%, your monthly payment would be $1,798.65 and your total interest costs over time would be $347,514.57. Or you could take out a 15-year loan at 5.6% and pay $2,467.20 per month and $144,095.81 in interest. You'd save $203,419 in interest on the 15-year loan. Sounds good, right?
However, if you took out a 30-year loan and invested the difference between the monthly payments for 15 years, you'd have $253,925.67 at the end of 15 years, assuming a 10% average annual return, which the S&P 500 has consistently provided. At that time, you'd still owe $213,147 on your home loan. You could pay off that balance and walk away with an extra $40,778.67.
So, if you're thinking You Don't Know What to Do, these numbers make clear that a 30-year mortgage is a better bet. Likewise, the math doesn't work on early mortgage payoff either — investing is the better deal.
So when that One Sweet Day comes and you're ready to buy a property, shop around for the best 30-year mortgage you can find, purchase a home that's comfortably in your budget, make a reasonable down payment, and commit to investing as much of your money as you can.
This choice could really Save the Day when it comes to achieving financial security.
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Christy Bieber has 15 years of experience as a personal finance and legal writer. She has written for many publications including Forbes, Kilplinger, CNN, WSJ, Credit Karma, Insurify and more.
