Owning a million-dollar house is a dream for many Americans. Here is a look at how to afford a million-dollar home and what kind of financial obligations are required.
How Much You Should Make to Afford a $1 Million Home
To afford a $1 million home, you should be making at least $150,000. The exact amount can vary depending on other financial factors such as your debt to income ratio, credit score, and the amount of money you have saved for a down payment.
The suggested range is anywhere from $150,000 to $300,000 per year. You’ll need a strong financial profile to afford a $1 million home with an annual salary closer to $150,000. This means you have good credit, low debt, and plenty of money saved for a down payment.
With a higher income, your financial profile does not have to be quite as strong. For instance, if you have a lower credit score or a lot of debt, experts recommend an income of at least $225,000. But this can also vary depending on the lender.
What is the Monthly Mortgage Payment on a $1 million House?
Depending on their financial situation, most borrowers can expect to pay somewhere in the ballpark of 4 – 6% in interest. The most qualified borrowers can expect to pay around 4-5%, whereas those with lower credit, higher debt, or less money in the bank should expect to pay closer to 5-6%.
A prime borrower who is able to secure an interest rate of 4% on a 30-year fixed-rate mortgage will pay around $4,400 per month. In contrast, a borrower with a 5% interest rate can expect to spend around $5,100 per month in mortgage payments.
So even with the best interest rate, borrowers should expect to spend around $55,000 per year in mortgage payments ($4400 x 12 = $53,200). Most experts agree that you should not spend more than 30% of your income on your mortgage. So even with the best financial profile, you must make around $175,000 per year to live comfortably at this rate. There are exceptions to the rule which may allow you to qualify with less income. But you should be aware of the associated risks.
That’s why more income is necessary if your financial profile is not as sound and you are offered a higher interest rate. At an interest rate of 5%, you’ll be spending around $60,000 annually on mortgage payments. This means you should be making around $200,000 per year to live comfortably. The exact figures will vary depending on the situation, but this is generally what you can expect.
What is the down payment on a $1 million house?
Most lenders recommend making a down payment of 20%. For a $1 million home, this means $200,000. This is not set in stone, and you may pay more or less depending on the circumstances. Most lenders issuing a large loan will require at least a 10% down payment or $100,000. But this may require mortgage insurance or a higher interest rate.
Or, if you’re worried about qualifying for the loan, you may consider making a larger down payment if you have the cash available. Putting down an extra 5-10% at closing can be a good way to save money in the long term because it may help you qualify for a lower interest rate. This can be helpful for those who have a lower credit score or a higher debt to income ratio and who don’t want to be stuck paying a higher interest rate for the next 30 years.
Also, keep in mind that the down payment isn’t the only expense you’ll pay at closing. Additional closing costs include loan origination fees, appraisal fees, title search, insurance fees, taxes, and credit check charges. Plus, any legal fees or broker commissions.
How to Afford a Million Dollar Home Bottom Line
To buy a million-dollar home, you’ll need a high income of at least $175,000 and significant savings for a down payment. You should budget for as much as 5-10% of the total loan amount in closing costs, which can add up to $50,000 – $100,000. It may be less if you are savvy with your money, but it’s’ something to keep in mind.