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
As a general guideline, you should aim to earn an annual income that is at least 3-5 times the value of the home you want to buy. So for a $5 million house, you would need a minimum gross annual income of $1.67 million if you follow the 3X rule. With the 5X rule, you could potentially buy the home with an income of $1 million. However, having a higher income provides more comfort and stability when taking on such a large mortgage.
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
Building long-term wealth through smart investing is key to affording a multi-million dollar home. Consistently invest in assets like stocks, bonds, real estate, and businesses over decades. Let the power of compound growth work in your favor. Having a substantial investment portfolio will help you more easily qualify for a mega mortgage.
Choose a Lower Cost of Living Area
Consider buying your luxury home in an area with a relatively lower cost of living compared to other major cities. For example, a $5 million mortgage is a lot more attainable in Houston versus New York City. You’ll get more house for your money in lower cost metros.
Have Excellent Credit
Lenders will want to see a strong credit history when reviewing applicants for jumbo loans over $1-2 million. Aim for a credit score of 740 or higher. Having little existing debt and a record of timely payments will help your chances. Also show consistent, reliable income over time.
Use a Co-Borrower
Your chances of getting approved for a mortgage are much better if you apply with a co-borrower, like a spouse or partner. Underwriters can consider both incomes and assets. Having two incomes that add up to $1 million can make a $5 million home much more attainable and manageable.
Make a Large Down Payment
I want to stress again that putting down more money at the beginning can lower the monthly payments and interest costs that come with buying a house that costs a lot. Try to make a 20% down payment or more if you can. For the lender, this shows that you are serious about paying for the house and lowers their risk.
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 that you have a lot of cash on hand after closing on such a pricey home. Plan to save enough for at least six months of mortgage payments and other living costs in case of an emergency.
Weigh the Opportunity Costs
Before you go after that $5 million dream home, think about what you might have to give up in exchange. You might have to keep working full-time instead of retiring early, or you might have less money for fun and vacations.
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?
To comfortably afford a $5 million house, you generally need a gross annual income between $1,000,000 and $2,500,000, according to financial advice websites.
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.