One million dollars is a lot of money in most parts of America. This is the case because the average price of a home in the country is $400,000. While $1.5 million sounds like a huge amount, it doesn’t get you that far in expensive coastal cities like Los Angeles, San Jose, New York, Seattle, and San Francisco.
The high prices of luxurious homes is a sign that the real estate market is strong and will likely remain the same for many years to come. This is why buying a $1.5 million home is reasonable if at all you can afford it. Inflation will likely push the home prices up, meaning you could never sell it at a loss.
When it comes to buying a home, the general rule of thumb is not spending more than three times your gross income on a home purchase. All that will come into focus later in the article as we seek to answer the question: what salary do you need to afford a $1.5 million home? Read on to find out!
The Minimum Salary You Need
If you want to buy a $1.5 million home, you need to earn at least $450,000. The more, the better. Some of the other financial considerations are:
Make a $300,000 down payment. You are free to make a higher down payment depending on your financial abilities. A higher down payment means you don’t have to pay higher monthly mortgages.
It will be better if you have a $150,000 buffer post down payment. This can be in the form of liquid securities or cash you can easily tap if you lose your job. It also comes in handy in case you had some kind of accident. Liquid securities can be your savings or any side hustle.
These financial benchmarks are fluid and tend to vary depending on your lender’s requirements. If you have a higher salary, you can make a lower down payment — those with lower salaries have to make higher down payments. If it is a low-interest environment, you can stretch the home purchase to five times your gross income. In simpler terms, you can make as little as $150,000 to buy a $1.5 million home.
However, if you don’t have a reliable cash buffer, you will be a little paranoid and stressed during the initial year. Given these constraints, you might be motivated to work harder and smarter than before now that you own a $1.5 million home! Most homeowners admit to having started putting in more efforts and diversifying their income soon after purchasing a million-dollar home.
Owning a $1.5 Million Home
When you own a $1.5 million home, you will have more costs than those that come with a median-priced home. We are talking $25,000 – $40,000 per year in higher heating bills, property taxes, higher maintenance costs, higher home insurance, higher landscaping costs, higher cleaning costs, higher mortgage costs, etc. Therefore, you shouldn’t think of $1.5 million as just the initial cost of purchasing the house. Instead, think about the ongoing costs that come with maintaining such a luxurious property.
Remember that the opportunity cost of owning a $1.5 million home is equal to the cost of not renting it. To put this into perspective, you can get $5,000 monthly for your million-dollar home but cannot pay the same amount yourself to rent. This is some kind of economic waste. If you find the home too big for your family, you can resort to renting it out and earn monthly income from it. For instance, if the home has four bathrooms and several bedrooms, you can make a decent monthly income from it. The market rent for a $1.5 million home is around $12,000 per month.
Generating such an amount of money from the luxurious mortgage feels more useful, especially if you are not ready to occupy it. Remember that the location of a house influences its cost significantly. For instance, if your home is in a more expensive part of the city, you are likely to generate more revenue from it. On the other hand, homes in the extreme end might not generate substantial monthly income. Therefore, you should consider these factors when purchasing a home.
Meeting the Cost of A Million Dollar Home
If you wish to own a million-dollar home, your minimum income should be $200,000. However, experts recommend that you have a gross income of $335,000 if you wish to purchase it comfortably. The standard income to own a million-dollar home is $250,000. In simpler terms, the multiple of gross income to own a million-dollar home is between three to five times. Once you go beyond 5X, you will find the home purchase quite stressful and financially suffocating. While owning a million-dollar home motivates you to work harder, some people drop their focus once they pay off their mortgage.
They become less motivated to work hard now that their living costs have dropped significantly. Many agree that paying off the mortgage early is advantageous — however; some think its ironic downside is less motivation. Nonetheless, you should strive to pay off your mortgage and get rid of debts. As you now know, making a larger down payment means lower mortgage rates. This is ideal, especially for those with lower salaries — you will not struggle to pay mortgage rates because they are significantly reduced. While this is the ideal way to purchase a $1.5 million home, it would mean that you have enough cash to make a 50-60% down payment.
Making such a down payment of $1.5 million means, you have to part with a lot of money! Those saving up for retirement might have an advantage because they have several thousands of dollars sitting around. Such individuals have the ability to purchase a $1.5 million home and have low-interest rates they can afford with low salaries. Therefore, if you are looking to meet the cost of a million-dollar home, you must ensure that your finances align with the maintenance costs.
How Do You Buy a $1.5 Million Home?
You might be asking yourself, can I afford a million-dollar home? You can afford such a home if you plan your budget right. The first thing is you need to qualify for a mortgage. Remember that mortgage availability for a million-dollar home depends on a number of factors. They include credit scores, down payment, and debt-to-service ratio. Your monthly payments on a $1.5 million home will also depend on a number of factors. These factors are interest rate, down payment, terms, and credit score.
Generally, if you make a 20% payment on a 30-year mortgage, your monthly mortgage payments will be $6,500 on a $1.5 million home. When looking to borrow a loan to finance your home purchase, you should keep in mind a number of factors. For instance, the most convenient loans have a set maximum amount you can borrow. The maximum amount for such loans was set at $520,000 in 2021, with the value varying from one location to another. In some locations, the amount could rise to over $900,000.
Either way, if you want to receive a conventional loan, you will have to make a down payment of over $300,000. That amount applies to median-priced locations. In prime locations, you will have to make a down payment of over $550,000. Given that a good number of buyers stick with the 20% down payment, they have to qualify for jumbo loans instead. While jumbo loans can help you purchase a house, they come with stricter requirements.
For instance, you must make a down payment of over 20% — anything less than that will subject your loan to private mortgage insurance. This is not ideal because it results in the additional cost of 1% of the home price every year. 1% is equal to around $10,000 of the total amount, which can be financially draining, especially if you have a fixed budget.
Million-Dollar Mortgages And Their Fine Print
Average Americans don’t buy million-dollar homes in cash. Luxurious property of this kind has unique requirements and automatically qualifies as a jumbo loan. As mentioned earlier, the limit for a regular loan is set at $550,000, a figure that changes according to location. Bigger loans come with higher risks for the lender. Given the significant number of risks attached to these loans, the government doesn’t back them.
Therefore, lenders protect themselves with strict approval criteria. Some of the commonly used criteria include higher interest rates and closing costs, higher credit scores, and bigger down payments. They also ensure that the borrower has sufficient cash reserves to finance the loan. If a person doesn’t meet all of these requirements, the jumbo loan application will not be approved.
Hidden Million-Dollar Home Ownership Costs
Purchasing a $1.5 million home doesn’t mean the end of expenses. There are several other expenses that come with a property of such financial magnitude. For instance, you must consider your home’s property taxes and premiums. These are some of the factors that might drive up the cost of a million-dollar home. If you are buying your home in an HOA area, you must add the monthly homeowners association fees.
The amount varies depending on the location and agreement terms. While you might be prepared for all the other costs, you might not be prepared for the high closing costs. In some cases, these costs can go up to 2% of the home’s value. This is why it is vital to have sufficient cash reserves that can cover a minimum of six months in mortgage payments. Here is a rough estimate of the additional costs you are likely to incur;
- Property taxes: They can go as high as $2000 per month on a million-dollar home. This figure is also dependent on the location of your house.
- Home insurance: Could go as high as $500 per month. This depends on the insurance policy you take and the insurance company you choose to work with.
- Maintenance: This is one of the biggest expenses when you own a million-dollar home. The total cost varies from $1,500 to $3,500, depending on how you care for your home. The amount could also be equal to 3% of the home’s value. For a $1.5 million home, this amount is significantly high. It covers all the repair costs and other related expenses.
- Homeownership association: If you move to a luxury neighbourhood that has shared amenities, the fees for homeowners association could go as high as $1,000 per month. This is a slightly high amount if you are operating on a fixed budget.
Precautions You Need to Take When Buying a $1.5 Million Home
If you don’t plan your finances right, purchasing a $1.5 million house can turn into a nightmare. Those that are driven only by the desire to own a million-dollar home tend to go overboard and sacrifice other essential money goals. Therefore, you need to be very careful with your finances lest you sink deep into debt.
For instance, paying hefty housing costs and mortgage or saving for a big down payment can affect your financial plans for the future — things like retirement savings could take a significant hit. This is why it is vital to consider if you can really afford a million-dollar home before getting a mortgage that will eat up a good part of your income. You should also consider the long-term unplanned expenses that could arise with home maintenance.
The Upsides of Owning a $1.5 Million Home
While owning a million-dollar home comes with financial struggles, it has several benefits. For instance, such homes hold their price due to their location or size. In fact, if you research the internet, you will find a thousand square feet condo going for one million dollars! The prime location of such properties justifies their hefty prices. You can get such a condo then rent it for a couple of months a year for $1,000 per night.
This could help you cover the mortgage and even help you generate profits! If you want to buy a $1.5 million house for investment purposes, then you should consider the location. It is advisable to go for properties close to popular spots for tourists. You can also consider those in remote and private areas for people seeking peace. This will guarantee a long-term passive income. Luxurious properties also tend to gain re-sell value, meaning you can’t experience any losses.
Buying a $1.5 million home is not a simple decision to make. While this is an excellent investment opportunity, you will have to pause some other goals. If you want to buy a $1.5 million home, you need an annual salary of $450,000. This is the amount needed to raise a decent mortgage down payment and other expenses.