Elon Musk is a well-known entrepreneur and billionaire who is best known for his roles in Tesla and SpaceX.
He has plenty of money, but recently he took out several very large mortgages on five properties in California.
When he borrowed this money, Musk faced some big decisions about which type of loans to go with. There are two options: fixed-rate mortgages or adjustable mortgages.
Fixed-rate mortgages provide the borrower with a guarantee of stable monthly payments.
Adjustable mortgages don’t offer that same benefit, but they do come with substantially lower rates.
Musk chose to take a big risk with his mortgage loans.
Instead of choosing a 30-year fixed-rate mortgage – which would have given him stable monthly payments – Musk chose a hybrid-adjustable loan (ARM).
The Tesla CEO, 49, took out several mortgages worth more than $61 million to buy five adjacent homes in the posh Bel-Air neighborhood of Los Angeles where celebrities like Jennifer Aniston and Kim Kardashian live, according to property records reviewed by Business Insider.
He bought two of the houses – which are located near one another in Bel Air – in 2012 and 2013 for $17 million and $6.75 million, respectively.
Musk bought one of the houses from actor Gene Wilder for $6.75 million, and another from actress Talia Shire for $6.4 million. The other three are located in the Hidden Hills neighborhood of Los Angeles and cost him $24 million combined.
For his new mortgages, Musk secured a floating rate loan with a 3% interest rate for the first six months, which will then increase to 4.5%, according to property records filed with the county recorder’s offices for Los Angeles County, San Mateo County and Alameda County in California.
The loans total $24.6 million from Citibank and $36.3 million from Morgan Stanley.
Musk was able to borrow a high-risk mortgage because he’s a billionaire.
With his wealth, he could afford to take a chance with an ARM mortgage and see his rates go up and payments rise if and when that would happen.
Musk was unlikely to find himself in a position where he couldn’t refinance his loan if needed, especially given his personal wealth and long-established borrowing relationships with major banks.
The typical borrower, however, might not be so equipped to bear the risk of an adjustable-rate mortgage.
The average person would likely find themselves in serious financial hardship if their rates rose — and there’s a good chance they will continue to do so in the forseable future.
Moe Bedard is the founder and lead mortgage analyst for LoanSafe.org. Since 2007, LoanSafe has helped over 2 million consumers with solutions to their mortgage problems and has been featured in the New York Times, LA Times, Fox Business, and many other media publications.