Owning a home is still a dream pursued by millions of people worldwide, and a $1 million house is the dream of those in a financial position to pursue such a lofty thought.
The objective of acquiring a $1 million home is all about your financial situation. It would be best if you had good credit, few and small debts, a significant savings portfolio, and some income to afford it.
Let’s look at all of the variables of how to buy a million dollar home.
The Overall Financial Plan
If you buy the $1 million home with cash, then finances are not much of a problem. Your only concern in that situation is property taxes, and you need to be able to cover the property taxes required annually.
But if you are planning on acquiring a mortgage to buy a $1 million home, finances are an issue. You will need the finances to cover both the monthly mortgage charge and the property taxes.
Let’s say the house you want is selling for a firm $1 million. The first question that will be asked is how much you plan to offer as a down payment. The more you show upfront, the less you will need to borrow, and the less significant will be the factors like your credit score. Maximize your down payment to make the rest of the process less financially painful.
Companies now offer to turn all buyers into cash buyers by providing the funds to make a cash offer. These companies – such as Knock or Ribbon Home – get paid back by you once you acquire your home. It allows you to avoid contingency scenarios where you have to sell your original home to buy the new one.
Bankers will next look at your income to debt ratio. Your income can be from current employment, or it can be income from investments. But you will need to show an income that can cover the mortgage payment and your monthly credit payments.
Your credit score must be sufficiently high to qualify for a mortgage for a $1 million home. That means you have been paying your credit card minimum balances, at least.
Besides your credit and outstanding loans, you need to consider all of your monthly expenses. Are you paying for someone’s education? Do you have automobile loans outstanding? What is your household budget per month?
You are about to add a significant new number to your monthly finances. The bank or lender will look over all of those numbers to see if you qualify for the mortgage.
How Much Income Do You Need To Buy A Million-Dollar Home?
To buy a million-dollar home, you will require an income of a minimum of $200,000 to 230,000 annually. This is necessary because when purchasing a million-dollar home, you must pay for upfront expenses, a down payment and closing costs, which can be more than 20% of the purchase price. Thus, it would help to have at least $ 200,000 saved to purchase a million-dollar home.
The salary or income may differ depending on the interest rate and the down payment size. These two can further discuss factors like the home’s location and others. Using the 28/36 rule to determine the amount of income you will require to acquire a million-dollar home is prescribed. According to the law, you can spend only 28 percent of your income on monthly housing costs and only up to 36 per cent on monthly debt payments.
We enable you to save for your home ownership dream.
How Much Is Mortgage On A Million Dollar Home?
If you are clear about buying a million-dollar home, you must consider the amount of mortgage that will be incurring. The average amount may range from $5000 to $6000 every month. But numerous factors will affect this amount. These factors, like down payment, credit score, interest rate and mortgage term, can determine how much you eventually pay for your million-dollar home.
The mortgage that you finally take will be converted into a “Jumbo Loan”. A jumbo loan exceeds the maximum conforming loan limit in your area. It is not necessary that the loan might turn into a jumbo loan, but considering the amount you take in as a mortgage, it is possible. Jumbo loans have stricter criteria when compared with conventional or government-backed mortgages.
Example: Suppose you have a 20% down payment. You have an interest rate of 3.25% and a 30-year fixed rate. This will bring your mortgage to around $4,294/ month. This is the rate if you are in Florida. This will differ according to your location and other factors.
It is advised that before you decide to buy a million-dollar home, you have savings for not just down payment or closing costs but also for mortgage payment for at least 6 to 12 months.
Factors Affecting Mortgage Rate
1. Down Payment:
There are certain loan amount limits in different locations. But it extends to $700,000. And if we consider this loan amount, you must make a down payment of around $300,000 to $500,000 to get a conventional loan.
The amount you pay in the down payment will decide how much your monthly mortgage amount will be. A standard 20% down payment on a one million property is a $200,000 outlay.
2. Loan Requirement:
The loan amount you borrow, before or after the down payment, will help you decide the amount you pay back every month. The loan-to-value ratio is the amount you borrow, the percentage of your home’s value.
The loan-to-value ratio is connected to the size of your down payment. Because the amount you would be paying in a down payment might be delivered without any loans, you should take a loan accordingly, affecting your monthly mortgage rate.
3. Monthly Payments:
The mortgage will be determined depending on the loan amount you have taken; hence, you can easily calculate the amount you will be required to pay every month. These monthly payments will also be affected by down payment size, mortgage term, interest rate, residence location, home size, etc. To be able to take a loan of this high amount, having a good credit score is a pre-condition.
4. Credit Score:
The higher your credit score, the more it is possible for you to get a more competitive mortgage rate. The minimum credit score you require will differ according to the loan amount. But since you plan on buying a one-million-dollar home, you will be required to take a high-interest loan, so you must maintain a good credit score.
You should have at least a 700 credit score to get approval for a jumbo loan. Moreover, you could face stricter restrictions. Lenders feel a higher risk in lending jumbo loans; hence, having a great credit score helps them decide in your favour.
5. Debt Requirement:
Your debt-to-income ratio is calculated depending on the amount of your monthly income that goes to debt payments like credit cards, car loans, student loans, or any other. If you already have a lot of debt before applying for a mortgage for your one million-dollar home, you might face problems getting the mortgage, as your borrowing power will be reduced.
There is no set debt-to-income ratio limit, but restrictions can range from 36% to 43%. Further, even if you meet the minimum requirement for the jumbo loan even while you have other debts, it wouldn’t be suggested to go for it.
What Are Some Hidden Costs Of Owning A Million-Dollar Home?
There are some hidden costs on a million-dollar home that might occur after you purchase or move into it. These expenses are sometimes major or minor.
- Utilities
You will be recurring a cost of around $ 1000 to $1500 on the utilities of your million-dollar home.
- Maintenance
It is impossible for you not to incur any cost of maintaining the million-dollar home you will eventually own. There is an average of around $800 to $ 3500 monthly for the house’s upkeep. As your house gets old, there is a high chance that the home will require more care if you do not decide to sell it after a few years.
It is suggested that you always keep at least 1 to 4% of the million-dollar home’s value towards the maintenance cost of the house. This mount will not involve the amount that you might undertake for some renovations. Make smart decisions and equate the million-dollar amount with the maintenance cost before you decide to take a mortgage because they can eventually lead to financial stress.
- Tax and insurance rate
You will be paying property tax for your million-dollar home. Taking home insurance is another necessity, considering the natural calamities. These costs might increase over time. Your tax rates might increase when the area that your home falls in suddenly sees the increased value of the property or the government decides to improve the overall tax rate for the property.
Regarding insurance for your million-dollar home, the rates might increase if your area becomes more prone to natural disasters or inflation, making building the property even more expensive.
- Association Fees
There are Homeowners Association Fees, which will start once you start in your million-dollar home. These associations will take charges for neighborhood pools, security patrols, common parks, etc. The million-dollar house may be in the posh or high-end area of the city. Hence, you might be required to pay around $1000 to $ 1200 monthly as a fee for all these common items.
Should I Buy A Million Dollar Home?
It can cost you around $1.1 to $1.5 million to buy your dream million-dollar house. But deciding if you should buy a million-dollar house depends on the salary you earn every month. You can afford to buy if your income is equal to or more than $22000. Your buying capacity will also depend on your clean finances and whether you have saved enough to pay for a huge down payment. You must also consider the amount that you will be taking in the mortgage for the home and if the loan amount, along with other expenses of your family, will put you under any financial stress.
The only factor that causes home prices to depreciate is a recession. We just had one, and interest rates are set in a way that we are not likely to have another one soon. So, if you trust the economy to operate normally, your $1 million home will be worth more over the long term.
Locating the house of your dreams is also a part of the exercise and the topic for another day. But, companies – such as Homesnap and Zillow – provide that service.
Purchasing a $! Million home is a nice thought, but you want to avoid being house rich and cash poor. Make a plan and take into consideration all of the above topics.
Good luck with your search.
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