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. Even if you have enough income to be approved for a loan, there are other expenses you have to take into account.
First and foremost, you have to have enough income to qualify for the loan. Unless you’re planning on paying cash for the property, you’ll have to get a jumbo loan, which has stricter income and credit requirements than a traditional mortgage. Most experts recommend not spending more than 28% of your monthly income on a mortgage payment. That means you should be making between $70,000 and $90,000 per month to afford the payments safely. This translates to an annual income of $840,000 to $1,080,000.
That’s the bare minimum lenders will accept, assuming that you can make the full down payment and have stellar credit and financial history. If not, you will have to show even more income and assets to make up the difference.
The down payment alone will cost $1,000,000 (if you’re planning on putting down the full 20%). So, that will leave you with a principal of $4,000,000. The standard interest rate on a 30-year jumbo loan is around 5%, which means your monthly principal and interest payments will be somewhere in the ballpark of $20,000 - $25,000 per month.
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.
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, it's 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.
Most experts recommend that the value of your home be somewhere in the ballpark of 25-40%, and some say no more than 30% to be on the safe side. But it largely depends on other factors such as your credit score and outstanding debts.
So, according to that logic, you should have a net worth of $12.5 to $20 million. Depending on how much debt you have, you may want a net worth of $16 million to feel comfortable purchasing a $5 million home, but that’s up to you to decide.
Even if you have plenty of income, things can always change. You could lose your job, or a recession or health problem could impact your ability to earn. So, you’ll want to make sure that you have savings and other assets to fall back on if you can no longer make your monthly mortgage payments. Purchasing a multi-million-dollar property is a significant investment that you shouldn’t make until you’re sure you can afford the price tag.
To decide if buying a $5 million home is the right choice for you, you'll want to assess your financial situation. You definitely should not purchase a multimillion-dollar property if you think you may struggle to make the payments. While real estate does appreciate over time, the more expensive a property is, the harder it can be to find another buyer.
If you go through some hard times financially and can’t make the payments, it may be tough to find another buyer in time to avoid default. If you default on a large loan, you may be forced to declare bankruptcy unless you have other assets you can liquidate, which may ruin your chances of homeownership in the future.
But, if you feel confident that you have enough income, the property is always a wise investment. If you have over a million sitting in the bank anyway, you might as well put it to use and buy your dream home. $5 million will afford you a gorgeous property anywhere in the world, so you might as well take advantage if you can afford it.
The best thing to do is speak to your accountant, banker, and financial adviser first to be sure that it’s a sound investment. Hopefully, they will give you honest advice about whether or not you can afford the purchase. But as long as you meet the financial criteria outlined in the article and factor in the associated costs, you shouldn’t have a problem purchasing a $5million home.