Purchasing a $10 home is a dream come true for many people. But if you find yourself with a sudden influx of cash and you're pondering the purchase of an eight-figure estate, you'll have to make sure that you fit the qualifications.
Unless you're planning on paying cash, you'll have to finance the purchase of a $10 million house with a jumbo loan – or a loan that falls outside the normal conforming loan limits. With a 20% down payment, you'll need to make a minimum of $1.6 million per year to afford a $10 million home.
Jumbo loans tend to have stricter underwriting standards than conforming loans, so you'll need to prove you have the income to afford the payments. Most 30-year fixed-rate jumbo loan mortgages feature an interest rate of about 5%. But you could secure a lower rate with good credentials, and you could also pay more if there is an issue with your credit.
So, assuming you can make the traditional 20% down payment ($2M), you'd be left with a principal balance of $8 million. At 5% interest, you'd have a monthly mortgage payment of about $43,000 on a $10 million house. You could get a lower rate if you have excellent credit and a good relationship with your lender. Most experts agree that you shouldn't spend more than 28% of your income on mortgage payments.
While you can qualify for a loan this large with only $1.6 million in annual income, it's better if you make even more. To comfortably afford such a loan, most experts recommend you make around $155,000 per month or $1.8 million per year.
In addition to having enough income, you'll also have to be sure that you can actually afford the home long term. That means looking at your other expenses and assets to determine if a $10 million residence is a wise financial decision.
If you're considering the purchase of an eight-figure property, the chances are that your general lifestyle is costly as well. So, you should factor in the costs of any existing debt such as student loan payments, car payments, childcare/schooling, vacation homes, etc. These are all things you should take into consideration before making a purchase.
Also, take into account any other assets you own. Having enough income is part of the equation. But anything can happen, and you want to be sure that you have other sources of cash to fall back on in case anything goes wrong. You could lose your job or decide to retire early.
Would you still have enough income to support the mortgage payments if that happened? Consider things like savings, investment properties, retirement accounts, and businesses you own. Active income alone may not be enough to afford a $10 million property, so make sure you have enough cash and liquid assets to fall back on if anything were to happen.
In addition to your monthly mortgage payment, you'll have to factor in any other associated costs, such as taxes, insurance, and maintenance. Your property tax bill will vary depending on where you live. For instance, if you live in New Jersey, your property tax rate would be 2.49%, whereas if you bought a house in Hawaii, it would only be $0.28%.
Although the difference may seem negligible, on a $10 million property, it's the difference between paying $249,000 and $28,000. So, it's essential to understand the local tax codes and how much you'll pay in taxes each year.
Insurance is a significant cost to consider as well. Many factors impact the amount it will cost to insure a multimillion-dollar home, including the location, the age of the home, your credit history, and the replacement cost.
It will also increase if you are insuring belongings inside the home, like jewelry or expensive paintings. With a $10 million home, you can expect to pay a pretty high deductible. So, it's wise to get a quote and factor that into your monthly budget before you make an offer.
Finally, maintenance is another major consideration. The exact cost of maintaining the property will vary depending on its size and your personal preference. Ten million dollars will afford you a massive estate that requires a full-time crew in some areas. But in major cities like New York and San Francisco, that may be the cost of a luxury condo. So, make sure to factor in the costs of cleaning, routine maintenance, landscaping, and any other associated fees. Plus, if you live in a condo or gated community, make sure to factor in homeowner's association fees.
Most experts agree that the cost of your home should be between 25-40% of your net worth. So to afford a $10 million home, your net worth should be between 25 and 40 million. When qualifying you for a loan, lenders won't look at your net worth as much as your income. But they will analyze your entire financial picture when making their decision, which includes any assets you own.
It isn't wise to have most of your wealth tied up in one particular asset or investment because it could cause a domino effect that leads you to lose everything if something terrible happens.
Having a high net worth gives you a bit more security. If you were to lose your job or experience health problems that limit your ability to make money, having other assets and income streams could help you stay afloat.
But if the bulk of your net worth is tied up in that one property, then a financial downturn could be disastrous. Plus, it typically takes longer to find a buyer for properties in the eight-figure range, so it may be tough to do so before your default if you need to sell. That's why it's wiser to have a decent cushion of cash or liquid assets before purchasing a $10 million estate.
So, it's essential to consider all of these factors when determining whether or not you should buy a $10 million home. Whether or not you ultimately decide to go through with the purchase depends on your financial outlook.
If you think you may struggle to make payments, you should definitely reconsider. No one needs a $10 million home, and there is no point in putting yourself in a precarious position just to afford a luxury purchase. Plus, you're going to be paying off the property for the next few decades, so you should be sure that you're ready to handle the commitment.
But, if you have a few million dollars sitting in your bank account collecting dust, real estate is always a wise investment. It's bound to appreciate, and building equity in a multi-million-dollar home can have various financial benefits.
Before you make any decisions, you should consult a financial planner, accountant, or investment banker. They will be able to give you honest advice as to whether the purchase is a smart investment or an impulse buy. But whatever you do, you must take your time and consider all the associated costs before making a decision. Otherwise, you may regret it later on.