Owning a five-million-dollar home is a dream for many people. Even in the most expensive cities in the US, it’s a major accomplishment. But you also have to be confident that you can afford it. However, even if you make enough to get a loan, you still need to think about other costs.
For most people, owning a $5 million house is a far-fetched dream. However, with the right financial planning and discipline, it is possible to afford such an extravagant home. Here are some tips on how you can realistically work towards buying a $5 million house.
Calculate Your Target Income
A good rule of thumb is to make at least three to five times the price of the home you want to buy every year. To buy a $5 million house, you would need to make at least $1 million a year. 67 million if you follow the 3X rule. With the 5X rule, a $1 million income might be enough to buy the house. Having a higher income, on the other hand, makes taking on such a big mortgage more comfortable and stable.
Build a Sizeable Down Payment
To comfortably afford a $5 million home, you should plan on putting down at least 20-40% as a down payment. This means having $1-2 million in cash saved up. The larger your down payment, the lower your monthly mortgage payments will be. Putting down less than 20% will also require private mortgage insurance that adds to your costs.
Reduce Other Debt Obligations
To qualify for a jumbo mortgage of this size, lenders will want to see that your other recurring debts are low relative to your income. This includes credit card payments, auto loans, student loans and other obligations. Try to pay off consumer debts and minimize expenses before applying for such a large home loan.
Invest Wisely Over Time
To buy a multimillion-dollar home, you need to build long-term wealth through smart investing. Over many years, consistently put money into stocks, bonds, real estate, and businesses. Let the power of compound growth work in your favor. If you have a lot of investments, it will be easier for you to get a mega mortgage.
Choose a Lower Cost of Living Area
You might want to buy your luxury home in a place where the cost of living is lower than in other big cities. For instance, it is much easier to get a $5 million mortgage in Houston than in New York City. Cities with lower prices will give you more house for your money.
Have Excellent Credit
When people apply for jumbo loans over $1 to 2 million, lenders will want to see a good credit history. Aim for a credit score of 740 or higher. It will help your chances if you don’t have a lot of debt and have a history of making payments on time. Also show consistent, reliable income over time.
Use a Co-Borrower
Applying for a mortgage with a co-borrower such as a spouse or partner can greatly improve your chances of approval. Underwriters can consider both incomes and assets. Having dual incomes totalling $1 million+ can make a $5 million home much more feasible and manageable.
Make a Large Down Payment
Again, it’s worth emphasizing that putting down more upfront can reduce the monthly payments and interest costs associated with such a pricey house Aim for 40% down or more if possible. This shows the lender you are financially committed to the home and lowers their risk exposure
Lock In a Low Interest Rate
Mortgage rates are still near historic lows as of 2022/2023 despite some recent hikes. Act soon while rates are low to lock in the most favorable rate possible Even a small rate reduction can save tens of thousands of dollars over your loan’s lifetime Monitor rate trends closely.
Account for Higher Expenses
Don’t forget that insurance, property taxes, maintenance and utilities will be higher on a $5 million residence. Budget for an extra $60,000+ annually in ownership costs. And furnish the home appropriately without overextending yourself.
Have Significant Reserves
Lenders will want to see you have plenty of cash reserves on hand after closing on such an expensive property, Be prepared to have at least 6 months of mortgage payments and other living expenses saved in case of an emergency
Weigh the Opportunity Costs
Before pursuing a $5 million dream home, carefully consider what you may have to sacrifice in exchange. For example, you may have to continue working full-time instead of retiring early or have less to spend on vacations and leisure.
Consider Alternative Real Estate Investments
Rather than tie up $5 million in your primary residence, you may want to invest in rental properties and real estate crowdfunding platforms for more diversification. This can provide greater flexibility and generate ongoing passive income.
Inherit Money or Win the Lottery
Of course, coming into a large lump sum of money by chance can instantly make buying a multi-million dollar house feasible. But since counting on an inheritance or lottery win is unrealistic, follow these tips to purposefully work towards your luxury home goals.
With prudent planning and disciplined saving over an extended period, a $5 million residence can eventually become a reality for ordinary folks determined to achieve an extraordinary dream. By following these tips, you can develop a realistic roadmap for buying and comfortably affording your own spectacular mansion one day.
hash-markHow to Afford a Five Million Dollar Home in 2022
Even if you have enough income to qualify for the loan, you will still need to do some careful budgeting to ensure you can truly afford the property. If you’re looking at purchasing a multi-million-dollar property, chances are, you live a fairly lavish lifestyle. So, lenders will also look at how much debt you have in addition to your income.
If you are a single adult with a high income or a couple with no children, you may have an easier time qualifying. But any additional debts such as childcare, schooling, college tuition, car payments, and so on will be factored into your overall debt calculation.
Plus, if you have any additional assets such as investment properties, retirement accounts, savings accounts, or businesses, this can also help you qualify. But make sure to factor in any additional debt or expenses related to those assets you still owe – such as a mortgage on a secondary residence. But any other income or liquid assets can help you show a lender that you can afford the property.
Most experts recommend an income of $1.2 million and above for such a large purchase because you’ll likely have other lifestyle expenses and debts that need to be factored in. So, applying for a loan with the bare minimum income may not cut it.
hash-markCost to Own a Five Million Dollar Home
In addition to your monthly mortgage payments, you also have to think about the other costs of owning a home, including taxes, insurance, and maintenance.
The exact cost of your property taxes will vary depending on where you live. For instance, the property tax rate in New Jersey is 2.49%, while in Hawaii, its only 0.28%. This may not seem like a big difference, but on a $5 million home, that’s the difference between $124,500 and $14,000. So, it’s essential to understand your tax burdens before purchasing the property. The national average is around 1.07% of the home’s assessed value, which would be $53,500 on a $5 million home.
Insurance is another major consideration you should keep in mind. Most multi-million-dollar properties fall outside the standard insurance policy range, so you should be aware of how much your policy will cost before you decide to buy the home. Insurance is another cost that varies greatly depending on the state and location.
For instance, the home may cost more to insure if it’s on the beach or in a flood zone because there may be more risk of property damage. The cost to insure a multi-million home ranges from $0.05 per 100 of insured value up to $0.95 per 100 of insured value, depending on various factors such as the property’s condition, the location, and your credit score. So, you should make sure to get a quote before committing to the purchase.
Maintenance is another important factor you must consider. The cost of maintaining the property will largely depend on the size and your own personal habits. For instance, in some places, $5 million will afford you a massive estate, whereas you could spend $5 million on a condo in some major cities. So before buying the property, it’s important to estimate how much it will cost to maintain, including regular repairs, cleaning, landscaping, painting, and so on.
Can I Afford A $1,000,000 House?
FAQ
How much income to afford a 5 million dollar house?
Financial advice websites say that you need a gross annual income of between $1,000,000 and $2,500,000 to comfortably afford a $5 million house.
What is the minimum income to afford a million dollar house?
The answer: $250,000 or more per year To afford a $1 million home, you’ll typically need an annual salary of at least $250,000 per year. This calculation assumes a 20% down payment and a 30-year fixed mortgage.
How much salary to afford a $500,000 house?
To afford a $500,000 house, you typically need an annual income between $116,640 and $160,000, depending on factors like down payment, interest rates, and other debts.
Can you afford a 10 million dollar home?
How can people afford 10 million dollar homes? Purchasing a $10 million home usually requires a very high income, often between $2. 5 to $3 million per year.