One of the measuring sticks that many people use to determine if they are successful is the value of their home. Being able to say, “I can afford a million dollar home,” is a milestone that many would agree in saying represents success. The question is, how much income do you need to afford a million dollar home?
To answer that question, we need to figure out what a typical mortgage payment for a million dollar home would look like, then we can determine just how much income you need to afford a million dollar home. A monthly mortgage payment is more than just the principal and interest. For example, it would also includes funds that are typically put into an escrow account to be paid as needed.
Principal And Interest
Checking today’s interest rates, a 30 year loan carries a rate of 4%. Using a mortgage calculator, the monthly principal+ interest payment would be $4774.15.
The cost of homeowner’s insurance will vary based on location, deductible as well as other factors. I was quoted a ballpark quote for homeowner’s insurance in my city in the Midwest with a typical $1000 deductible. The quote given to me was $3800 per year, or $316.67 per month.
Property tax rates also vary significantly depending upon where you live. Usually property tax rates are set by the county you live in. My county assesses a property tax rate of 1.05% of the value of the home. Using that rate, a home worth one million dollars would have an annual property tax bill of $10,500 or $875 a month.
Private Mortgage Insurance (PMI)
If a person would finance the full price of the home, private mortgage insurance (PMI) would have to be paid until the loan to value rational drops below 80%. PMI rates may also vary, but for this exercise my lender quoted me a monthly PMI payment of $416.67.
Using the above information, our sample mortgage payment for financing a million dollar home is:
- Principal + Interest: $4774.15
- Homeowner’s Insurance: $316.67
- Property Taxes: $875
- Personal Mortgage Insurance: $416.67
Total Monthly Mortgage Payment: $6382.49
Income Needed To Afford a Million Dollar Home
Now that we have an idea of how much a mortgage payment would be on a million dollar home, we can determine what kind of income is required to afford it. As with many of the components in this process, how large of a payment the bank thinks you can afford can vary. A person’s current monthly debt payments could reduce the amount a lender may borrow. Without knowing a specific person’s current debt situation, a good rule of thumb is to keep your mortgage payment to a maximum of 28% of your gross income.
Using that figure, a person would need an income of $273,535 to afford a million dollar home.
There’s a lot of variability in determining what a mortgage payment would be for a home worth a million dollars. This article calculates a sample value, but it could be very different by changing a few values such as the down payment, the interest rate, or the annual property tax amount. But given the template of how the value was calculated, a person should be able to gather the specific information and for their unique situation and answer the question, “How much do I need to earn to afford a million dollar home?”
How about you, Clever Friends, have you ever looked into how much you would have to earn to afford a million dollar home in your area?
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