Elon Musk Has Billions, but Still Took Out Mortgages. Here's Why

Mortgages don't just make sense for people who can't afford to buy a home in cash.

Elon Musk has founded Tesla, SpaceX, and a number of other companies. Unsurprisingly, he has become quite wealthy through his entrepreneurship. Musk is actually the richest person in the world, and his net worth totals more than $200 billion.

While Musk obviously has plenty of money to buy a home outright if he wishes to do so, he's opted out of this approach.

In fact, Musk reportedly took out a combined total of $61 million in mortgages in 2018 for several properties in Bel Air and the Bay Area. This included $50 million in new mortgage debt, as well as a refinance loan that he used to repay a mortgage that he had used to purchase a property in 2017. Collectively, these mortgages had a monthly payment totaling around $180,000.

Given the amount of money that Musk has, it's reasonable to wonder why the billionaire would bother borrowing to buy properties. But there's one simple reason why his decision to take out loans was likely a smart one.

The simple -- yet important -- reason why Musk borrows to buy properties

Musk likely borrowed to purchase his properties for the same reason that other wealthy people -- including Warren Buffett -- choose to take out home loans. Doing so allows them to avoid tying up their assets and to maintain liquidity so they can do other things with their money that can produce better returns.

See, mortgage loans tend to have very low interest rates. So although Musk borrowed a fortune, the financing charges that he'll pay will be very affordable relative to the amount of money the bank loaned him. Mortgage rates are generally well below 5% -- even when borrowing large sums of money -- and the only return on investment (ROI) that you'd get from avoiding this type of loan is the interest savings.

That means if Musk suspects he can make more on his money than the amount he could save by avoiding interest, he's better off borrowing for a home and putting his dollars elsewhere.

In his particular case, Musk has repeatedly purchased shares of Tesla on the open market to show confidence in his company. And since Tesla shares have increased substantially in value since 2017, Musk made a smart decision by betting on his company rather than tying up his money in a home.

What can the average home buyer learn from Musk's example?

The fact that Musk opted to take out a mortgage on his homes shows why most typical Americans should do the same.

While finance experts such as Dave Ramsey suggest paying cash for a house when possible or taking out the smallest mortgage you can for the shortest time, doing so comes at a big cost. You give up the chance to do other things with your money that could produce a better ROI.

While you do want to put around 20% down on a home if you can -- both to avoid private mortgage insurance and to reduce the chances of owing more than your house is worth -- putting down more or paying off your loan early may not pay off for you in the end.