You have plenty in your savings account, little debt, and a reliable income. When looking for your new home, you might be asking yourself: can I afford a million-dollar home? To help you answer that question, we will explore how much it takes to afford a million-dollar home, the amount of money you need to make, and the typical down payments and mortgage required. In the early 2000s, a million dollars used to be a lot of money.
However, with time, more and more people have become millionaires, with several becoming billionaires. Luxury homes that cost a million dollars and over have become a common sight in major cities across the country. In fact, they have become unavoidable, as most people strive to own them. A state like California has several thousands of million-dollar homes, with residents going for a luxurious lifestyle. But did you know that you don’t have to be a millionaire to afford a million-dollar home? We will enlighten you on how that is possible.
There are several reasons why someone might want to own a million-dollar home. These houses are often comfortable, large, and feature high-quality accessories that make life enjoyable. They have high-end features like a mini-movie theater, a home gym, a pool area, and a luxurious patio. Most of these homes are often secluded, giving you the privacy you need. So, can you afford a million-dollar home? Here is how you can determine the possibility of owning a million-dollar home.
The Amount of Money Needed to Afford a Million-Dollar Home
If you have a net worth of over one million dollars, you can easily afford a million-dollar home. Such wealth puts you in a position to purchase a million-dollar home right away. When you pay a sizeable down payment, you will need a lower monthly income to afford a million-dollar home. Generally, for most Americans to own a million-dollar home, they need to make around $230,000 annually. Looking at it, this figure is not sufficient to buy you a million-dollar home.
Therefore, you will have to make a massive down payment to make lower monthly payments. Aim for a 20% down payment, around $200,000 of the total amount. You will also need little debt, clean finances, and an excellent credit score. Remember that the higher your down payment is, the lower your monthly mortgage. This means that a lower annual income could adequately finance a million-dollar home. For that to happen, you must have enough cash in your account to make a hefty down payment of 50%, 60%, or even 70%! This is a significantly high amount of money considering that the house costs one million dollars.
The source of money to finance this venture varies from one person to another. Those planning for retirement could have several thousand or millions saved up. This means they can make a hefty down payment and have low monthly mortgage payments to sustain their lifestyle.
Owning a Million Dollar Home
Wondering how you can afford a million-dollar home? The first thing is you need to qualify for a mortgage. Several factors determine the availability of a mortgage for a million-dollar home. Some of these factors are credit scores, the down payment size, and the debt-to-service ratio.
The monthly mortgage payments on a million-dollar home depend on factors like your down payment, credit score, interest rate, and down payment. Generally, a 30-year mortgage with a 20% down payment means you will have to pay a $4,500 monthly mortgage. This can be either affordable or costly, depending on your annual income. As mentioned earlier, several factors determine the mortgage available for a million-dollar home. Let’s discuss them in detail.
It is vital to note that most conventional loans have a maximum amount of money that you can borrow. According to the Department of Finance, the full amount is set at $567,950 as of 2021. However, this applies to some specific locations, with others having the amount as high as one million dollars. Either way, the only way you can get a conventional loan is through making a down payment of over $300,000. In some areas, you will have to make a down payment of around $500,000.
Given that most people stick to the average 20% down payment, they must qualify for a jumbo loan to finance the purchase. While this is helpful, it comes with strict requirements. For instance, if you make a down payment of less than 20%, your loan could be subjected to private mortgage insurance. This increases the cost by 0.5% to 1% of the mortgage payment annually (an equivalent of $5,000 – $10,000).
This is an honest evaluation of the buyer’s financial situation. It refers to the ratio of the annual mortgage payments and other related costs. The cost is combined with the annual household income. Given the low-interest rates, most lenders prefer ratios below 32%. For instance, if you and your partner have a combined income of $250,000, the total mortgage payment and other related expenses are $75,000. In that case, your ratio will be ($75,000/250,000). If the annual costs are $100,000, your ratio will increase to 40%. Lenders do not prefer a higher ratio; this means you will struggle to get a financer.
Another essential factor that affects the availability of mortgage loans is your credit score. Most conventional loans prefer credit scores of around 620 and above. However, if you want a jumbo loan, the credit score should be 740. You can get lenders willing to accept a credit score of 660 on a down payment, income, and other related factors. Nonetheless, you should be over 700 just to be safe. This is one way you can get your hands on a good mortgage loan.
How To Afford a Million Dollar Home
So, how can you afford a million-dollar home? This section discusses some of the ways you can afford a million-dollar home. They include;
Work with the Annual Salary Income
If you want to buy a million-dollar home, you will need at least $225,000 in annual income. This is the amount needed to make monthly mortgage payments. Your interest rate and down payment will determine the amount of money you need to set aside. If you make a small down payment, you will need to earn around $300,000 annually to finance the mortgage and other housing costs.
However, if you make a large down payment, you will need to earn around $200,000 annually. Based on the 28/36 rule, you should not spend more than 28 percent of your monthly income on housing costs. You should also not spend 36% of your monthly income on debt payments.
Understand the Tax Implications of a Million Dollar Home
You might be surprised to learn how buying a million-dollar home affects your taxes. Due to the $750,000 cap on the mortgage tax deduction, borrowers that put down less than $250,000 could see their tax savings significantly increased yearly. This will continue until your primary loan total falls below $750,000. For example, in New York, the tax costs for a one million dollar property amounts to 15%.
While there will be no mortgage interest deduction if you choose to rent out your property, there are various deductions available to homeowners. Some of these deductions could result in tax-free income. Even though this sounds profitable, it can be challenging because finding renters and managing a property is tedious. You might find yourself spending too much time on the property.
Fractional Home Ownership
Did you know that you can own a million-dollar home by only paying a fraction of the total price? This is possible through fractional homeownership. You can team up with several other investors and purchase a million-dollar home. If you are in a group of four, that means every member will pay $250,000. This is much more affordable than paying a million dollars by yourself.
Fractional homeownership comes with several advantages. For example, it is affordable. All the costs of purchasing a home and maintaining it are shared. Besides, you don’t have to worry about managing the house because responsibilities are distributed equally. This goes a long way in making your life easier.
However, fractional ownership also has its downside. For instance, you will not have total control over the property. Any decisions regarding the house must be agreed upon by other members. This can slow down the decision-making process. Remember that some members might have varying opinions that can jeopardize the planning and implementation of ideas.
Acquire a Jumbo Loan
If you are not sure of your financial ability to own a million-dollar home, you can acquire a jumbo loan. Remember that your ability to get loan approval is influenced by a wide range of factors. For instance, you will need a down payment and closing costs of around $225,000, a credit score of 740, and enough savings to cover 6-12 months of mortgage payments.
Given that the loan amount is more than the maximum amount allowed in a given area, it is considered a jumbo loan. In most cases, the cap is set at $510,000, but it could rise in expensive markets like New York. In such areas, it could go as high as $800,000. Jumbo loans tend to have strict requirements than conventional loans. Some of the factors considered when you apply for jumbo loans include;
The Size of Down Payment
Remember that the total amount of money you can borrow with conventional loan lenders is capped. According to statistics, the maximum home loan amount was set at $550,000 in 2021. In the US, the traditional down payment for a home is 20%. Although some mortgages need a down payment of 10% or 15%, you can buy a home with only a 3.5% down payment. This is possible thanks to programs like the Federal Housing Administration. Some private mortgage insurance companies might need you to pay the maximum down payment in order to qualify for coverage. Otherwise, the monthly payment is likely to increase by 1%.
The Debt-to-Income Ratio
This is another important metric that jumbo loan lenders use to measure the financial security of a buyer. It measures how much your liabilities are compared to your annual income. Most jumbo loan lenders prefer a ratio of 32%. Anything higher than that might be rejected.
Plan For Additional Expenses
While you might have planned for the initial cost, you should also plan for additional expenses that go beyond the mortgage. You should consider these costs when budgeting for life in a million-dollar home. Mostly, lenders prefer that you purchase private mortgage insurance if you make a down payment of less than 20%. This can increase the total loan value by 1%.
If you make a down payment of $200,000, you will have to make an additional payment of $375 in monthly payments. This can be quite costly considering the cost of a million-dollar home. Besides, you may be charged a monthly fee by the homeowners association if your neighborhood has one. These associations have extra codes and rules that must be agreed upon by residents when they move into a home.
You might also have to incur additional costs when a home undergoes renovations or improvement projects. If you want to do these renovations, you must get permission from the necessary authorities. Such costs could add up to an extra $10,000 a year or $850 a month. Remember that million-dollar properties require regular maintenance and proper management. This results in extra costs.
Consider the Maintenance Costs
Statistics show that it costs around $1,000 to maintain a million-dollar home. As the house gets older, these costs will increase. Therefore, you should set aside 1-4% of your home’s worth for maintenance expenses annually. To put that into context, you should set aside $40,000 for a one million dollars home. While maintenance might seem basic, it is the highest cost that homeowners face.
Owning a million-dollar home is everyone’s dream. While everybody has a different financial ability, there is a way you can own a luxurious million-dollar home. You need to know your financial ability and whether you can afford this venture. Your annual income and credit score are some of the factors that will determine your affordability.