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How People Like Mark Zuckerberg Get "Free Money"

Mark Zuckerberg just refinanced his Palo Alto mansion for an exorbitantly low rate of 1.05 percent, according to a "report by Bloomberg":http://www.bloomberg.com/news/2012-07-16/zuckerberg-s-loan-gives-new-meaning-to-the-1-mortgages.html. Why would the...

Mark Zuckerberg just refinanced his Palo Alto mansion for an exorbitantly low rate of 1.05 percent. Why would the 40th wealthiest man in the world, freshly enriched by the controversial Facebook IPO, even need to borrow to buy a home worth only a few million dollars? Because it's hard to say no to essentially "free money."

"When you can borrow at a rate below inflation, you're borrowing for free," Greg McBride, a senior financial analyst with Bankrate Inc., told Bloobmerg. "This is the concept of using other people's money and it preserves financial flexibility for the borrower."

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The Zuckerbergs’ newly refinanced 5,1617-square-foot, 5-bedroom Palo Alto mansion

Even though Zuckerberg is worth approximately $15.7 billion, deals like this just make too much sense. The ultra rich generally don't have too much liquid assets or cash on hand, mainly because cash depreciates value quickly. They're better served investing their dollars in more profitable ventures. "Even if someone would be able to pay off that mortgage with cash or other assets, they don't want to tie up their holdings in real estate because they may have access to other types of more attractive investments," said Sandi Bragar, director of planning at San Francisco wealth manager Aspiriant.

As such, many of the the country's one percenters actually borrow money for big purchases like homes. Banks in turn are willing to take the minimal risk since they know the wealthy can make the monthly payments. For the banks, it's an easy trade. As the Federal Reserve keeps its Fed Funds rate at record lows (0 to 0.25 percent) in an effort to jumpstart the economy (or at the least, prevent it from collapse), banks can borrow even cheaper so everyone, at least the rich, can make or save money. Of course, given Zuckerberg’s reputation, it’s probably easier for him to get special treatment. Still, wealth begets wealth, says Rob Kricena, a regional managing director at Wells Fargo Private Bank. "In our experience the majority of high-net-worth individuals do have a mortgage," he said.

Remember Libor? Zuckerberg’s mortgage is calculated at Libor plus 0.8 percent, giving him the initial rate of 1.05, which also happens to be the minimum rate on the account.

Meanwhile, the rest of us find it tough to get past even the application process. In this world, the rich get richer while the rest of us are well, stuck. With that said, Zuckerberg is on an adjustable rate mortgage, meaning that his rate will fluctuate with the markets, which means the insane rate he is getting is, at the very least, only temporary.