How to Afford a Million Dollar House
A barometer that many successful people and their peers use to define if they’ve made it or not is how much their home is worth.
Most would agree that having the ability to afford a one million dollar home does indicate a notable achievement. So, if you can afford this type of home, your income level is considered very good. Want to find out the income you need to buy a one million dollar home?
For that, you need to first find out the mortgage payment for a $1 million home, then you will understand how much income is necessary to be approved to buy your dream home (or for some their starter home). Your home loan’s principal and interest are not the only things to pay for on a home. You will have to pay for property taxes, homeowners insurance, and if applicable HOA dues, supplemental taxes like Mello Roos, or taxes for local schools.
Average prices for single family detached homes with 3 bedrooms in San Francisco is $1,248,000, Los Angeles is $908,250, San Diego is $602,000. Of course the price depends on the neighborhood. Homes over one million dollars are plentiful if do a search on Zillow or speak with a local real estate agent.
The Down Payment
Affordability is also based on your down payment. If don’t have a sufficient down payment, that $1-million home is out of reach for the time being. Fortunately, there are choices of down payment if you have great credit and high income. A down payment of 20% or more is not always required.
In fact, as long as your overall debt ratios are less than 43, you should be fine for 10-percent down. The 5-down program for a home up to $1 million is stricter on debt ratios and credit scores. There are special programs that require absolutely no mortgage insurance. However, the interest rate is higher than for a buyer who brings in 20-percent.
An example are today’s rates (as of 11-20-2017) which are hovering around 4.25% for a 30-year fixed jumbo with 20-percent down and qualifying income. While someone who puts down just 10-percent, will be offered a rate of 4.875%. Since there is added risk for the lender they put the increased risk into the interest rate.
How Much is the Payment?
The monthly principal + interest payment will be $4,673 on a 30 year fixed 4.25% (20% down)
The monthly principal + interest payment is $5,027 on a 30 year fixed 4.875% (10% down).
The rates for property tax will vary a lot based on your state. If we use L.A. County’s average property tax rate of 1.16% on a home valued at $1 million, the yearly property tax bill of $11,600 or $966 a month. See a history of rates on this page from the L.A. Times.
As we all are too familiar with insurance, it can vary a lot based on your location. If you want to live in a neighborhood nestled in the hills such as Los Feliz, Woodland Hills, Laguna Beach, Palos Verdes, and many others, your insurance may be higher due to living in an area prone to having brush fires and/or mudslides. If we use the average property tax rate of .35% on a home valued at $1 million, the yearly property tax bill is $3,500 or $291 a month.
Income Needed To Afford a Million Dollar Home
Now that you know how much the payment will be on $1 million home, you’ll need to have qualifying income to successfully make a purchase. Your income needs to be documented by providing your last two years of tax returns.
Some borrowers can use 12-24 months of bank statements to document their income but will need a higher down payment or equity of at least 20% for a refinance. A smart guideline to follow is to spend only up to 28% of your gross income on the mortgage. This leaves you some room for any other monthly debts you may have or are thinking of having in the near future.
Your gross debt service ratio must be less than 43% in order to afford the home with ten-percent down. That means you (or you and another buyer) will need to earn an average gross salary of $14,613 per month (or $175,367 per annually) to qualify.
Example: $5,027 + $966 + $291 = $6,284 / .43 = $14,613
If you’re self-employed, this figure needs to be your adjusted gross income on IRS form 1040.
Be Smart and Don’t Extend Yourself
Determining how much to spend on a home, you need to think about the following factors:
Saving for retirement — The debt to income ratios don’t factor in your contributions to an IRA or 401K plan. Make sure your monthly finances include saving for retirement. The growth of money you invest in the stock market for two or three decades can be very substantial.
Rising interest rates — While it’s true that interest rates since 2013 have been very low and help you afford a $1-million home. What will happen if you need to refinance the mortgage in a few years because you took a 5-or-7-year Fixed ARM?
If rates jump in a year or two another full percent to 5.875% and your income stays the same, your monthly mortgage payment would increase to $5,620. Perhaps sticking with a 30-year fixed is a better option.
Buying a home is probably going to be the largest purchase you’ll ever engage in, so make sure you consider all scenarios so your life is financial sound and stable.