The idea of buying a million-dollar home might conjure up thoughts of Scrooge McDuck swimming in a pool of money, but seven figures just doesn’t go as far as it used to in today’s housing market. According to an August 2024 report from Redfin, a record 8.5% of U.S. homes are worth $1 million or more.
Whether you’re buying a sprawling ranch in rural Montana or a 600-square-foot condo in Manhattan, here’s the salary you need to afford a million-dollar home using a mortgage.
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Calculating the Monthly Payment on a $1M Home
The salary you need to buy a million-dollar home varies based on your monthly mortgage payment, which is influenced by factors like:
— Location. Where you buy a home directly impacts the cost of two main aspects of your monthly payment: property tax rates and home insurance rates. Your location also determines the type of mortgage available for a $1 million home. That’s because conforming loan limits, which are set by Fannie Mae and Freddie Mac, are based on the property location. In some parts of the country, including high-cost cities like New York or states like Hawaii, you can buy a $1 million home with a conforming loan or even an FHA or VA mortgage. But in most of the U.S., you’ll need to take outa jumbo mortgage (or come prepared with a six-figure down payment).
— Down payment. When it comes to down payments, bigger is better. A conventional loan with less than 20% down usually requires private mortgage insurance, or PMI, which increases your monthly payment. Increasing your down payment helps you avoid PMI and save money every month. And putting more money down makes your loan more affordable. Putting 25% down on a $1 million home can save you $300 per month compared with 20% down — that is, if you have the spare $50,000 to pay up front.
— Current mortgage rates. The mortgage interest rate you pay drives your monthly payment and how much house you can afford. For example, the payment on a $800,000 home loan with a 30-year fixed repayment term is $526 higher at a 7% mortgage rate than a 6% rate. Some factors that determine your mortgage interest rate are within your control — like your credit score and debt-to-income ratio — but rates are also influenced by greater economic conditions.
The chart below shows what the monthly mortgage payment might look like on a $1 million home under two scenarios. These calculations assume a 30-year fixed-rate loan at a 6% mortgage rate.
The lower monthly payment scenario involves a larger down payment and a home with cheaper insurance and property tax rates. You can buy a million-dollar home with a lower salary if you come prepared with more money up front. Other factors that can reduce what you need to earn include lower escrow costs, such as property taxes, homeowners insurance and homeowners association fees. Your property location can really influence homeownership charges and how much you qualify to borrow.
In the higher monthly payment scenario, you’d need to earn more to afford the mortgage on a million-dollar home for two reasons: a lower down payment and higher homeownership costs. You can put down a lot less than 20% if you buy in a high-cost area with a conforming loan. For this hypothetical, let’s say your property taxes are higher and you have to pay private mortgage insurance and HOA fees (which can run in the thousands for a luxury community).
Of course, all these numbers are adjustable, and there’s plenty of room in between both scenarios. If you’re able to make a 50% down payment, then you could end up with a mortgage payment closer to $4,000 per month and wouldn’t need as high of a salary. Or if you opt for a shorter loan term, like a 15-year mortgage, you’d have higher monthly payments and would need that higher salary.
[Calculate: Use Our Free Mortgage Calculator to Estimate Your Monthly Payments.]
Formulas to Determine How Much House You Can Afford
When it comes to estimating housing affordability, there are two (very different) rules of thumb: You should spend 28% or less of your monthly income on housing, and you can afford a house that’s 2.5 times your annual salary at most.
Per the 28/36 rule, you should spend no more than 28% of your gross monthly income on housing and 36% on your total debt, including mortgage, auto loan and credit card payments. That 28% part includes not just your mortgage principal and interest payments, but your home insurance, property taxes and homeowners association fees as well. Understand that mortgage lenders can and do approve home loans with higher ratios. However, this rule tells you what most people can comfortably afford.
Here’s the combined household income you need to afford a million-dollar home using the examples above and the 28/36 rule:
— For the low-end mortgage payment of $5,930, your gross monthly income would need to be at least $21,179. That’s an annual salary of $254,148 before taxes and deductions. Additionally, your other monthly debt payments should not exceed $1,694 to keep your total debts limited to 36% of your income.
— On the high end, you’d need to bring in $38,736 or more monthly to afford a $10,846 mortgage payment, which translates to a $464,832 salary. Your other monthly debt obligations should not exceed $3,099.
The simpler school of thought is that you can afford a house that’s 2.5 times your salary. In this case, to buy a $1 million home, you’d need to make $400,000 annually.
The 2.5 times your income rule doesn’t consider mortgage rates, down payment amount or many of the other factors that go into housing costs, however, and it’s a pretty conservative estimate. For example, someone bringing in $100,000 per year would theoretically be able to afford a home worth $250,000 — and most buyers would be hard-pressed to find a starter home in that price range.
Determining Housing Affordability Isn’t One-Size-Fits-All
Whether you can afford a million-dollar home depends on many factors that are unique to your financial situation: Are you in a dual-income household? Do you have assets you can sell for a down payment? What type of house are you buying and where?
The affordability formulas used above are a good starting point, but there’s no magic number in terms of what salary you need to buy a million-dollar property.
To truly find out if you can buy a home worth $1 million or more, contact a mortgage loan officer. Getting preapproved for a mortgage gives you a good idea of what type of house you can afford. And in the case of luxury real estate, it’s probably wise to work with a third-party financial advisor who can guide you through the process.
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This Is the Salary You Need to Buy a $1M House originally appeared on usnews.com
