Lots of people want to buy their dream home, but when you dream of buying a million dollar house, it may seem out of reach. However, there are still steps you can take to get yourself closer to making that million dollar home purchase – even if you cannot afford a million dollar house outright.
There is no way to avoid the fact that most of the funds to afford a million dollar house will come from getting a mortgage, but even if you are getting a mortgage there are various ways to make sure that you get a good deal. You do not have to have a net worth of millions of dollars in order to buy the house of your dreams.
Of course, if you think that a million dollar house is a bit extreme, you can always look at houses with a lower purchase price. If you want a certain size of house but cannot afford it, there are other ways to address this too.
Why buy a million dollar house?
The first thing to ask yourself when you are looking at any major purchase is whether or not you really want to buy a million dollar house. If you have fallen in love with a certain house or a certain style of house, the answer may be a resounding yes. Either way, you should make sure that you are ready and want to undertake the task you have set yourself before you take out a jumbo loan to help you afford your dream home.
Could a cheaper house suffice?
It takes a lot of work to afford a million dollar house. You should decide if a cheaper house might suit your needs, especially if you think you might struggle to pay for a million dollar dream home.
You might find that a cheaper house can meet your needs. You might be able to cut down on the number of rooms your home has, or have a smaller garden, or less private parking. There are various ways you can change the type of property you buy in order to cut down the cost.
While you may want to own your dream home, you might also want to consider the stress involved with trying to afford a million dollar house. Living in a large house with all the amenities you need might be appealing, but financial stress could sap all the enjoyment you would have from owning such a home. Thinking realistically about how much house you can afford is important.
Consider location for your dream home
If you are looking for your dream home, you might find that in some parts of the USA it could be drastically more or less than a million dollars. For example, in San Francisco you might find that a million dollar house is much more modest compared to a million dollar house in Kentucky. If you live in a cheaper area, you could have a property that looks like an expensive house without the actual housing expenses.
Before you buy a million dollar house you will also want to make sure that it really is the right house for you. Find the right property to make sure that it is worth keeping up with the mortgage payments. You should consider location, amenities, whether or not there is a homeowners association as well as whether or not you will want to move in the future. If you think you will not be happy permanently in a location, it may be unwise to buy a million dollar house. You might instead want to buy a cheaper home or rent a property until you know for certain where you want to settle down.
If you have decided that you want to go ahead with buying a million dollar house, the next thing to look at is how to afford it.
The down payment
A significant part of buying a million dollar home – or any home – will be the down payment or deposit. This is the one-off upfront cost where you pay cash towards the cost of a home. The rest of the cost is typically paid for via getting a mortgage with a bank or mortgage provider.
Typically, banks will offer mortgages as long as someone can pay at least 5% of the property cost up front as a deposit. This means that for a 1 million dollar home you could need to have a deposit of at least $50,000. This is the first big hurdle toward being able to afford a house valued at million dollars.
Typically, the only way to get a mortgage without having a down payment is to have a guarantor or suitable collateral. This generally means that getting a mortgage without a deposit is only possible if you can prove that you can definitely afford the house, which can be difficult for people.
If, like most people, you need to get a deposit to buy a million dollar house, you will often find that you get a better interest rate on your mortgage loan by having a higher deposit. Generally, the less money you have to borrow, the better your interest rate will be.
How can I save up a deposit?
Since we know a deposit is generally essential for getting a mortgage, and since your interest rate depends on how much of a deposit you can save up, knowing how to save up a deposit is vital.
Saving up a deposit can be difficult, especially if your aim is the $50,000 needed for a 1 million dollar home. The best way to save up is to look at your income and expenses. You should look at your accounts for at least six months in order to make sure that you have a good handle on where you can save money.
The best ways to save money are to cut back on expenses. Some people decide to live in cheaper accommodation such as living in a caravan rental property in order to cut their outgoings. Other people may be able to cut their discretionary spending such as takeouts, holidays, or buying clothes. There are plenty of money-saving mantras that people follow to help them save. Obviously, this is not realistic advice for anyone who is struggling to make their monthly bills – but if you cannot afford your bills, buying a million dollar house may be a plan to pursue after you have got your monthly finances in balance.
Speaking of monthly payments, the other main cost of buying a house is the monthly mortgage payment that you have to make to pay back your mortgage loan.
You need to make sure that you can afford the monthly mortgage payments for your home before you agree to a mortgage. In a way it is good that mortgage providers rarely give mortgages to people who cannot make the repayments. A good rule of thumb is that if you can make payments for a rental property, you can probably make the mortgage payments for a house of similar cost. This does however mean that if you want to go from renting properties with low home prices to buying a million dollar house, you may find a large jump in the monthly mortgage payment you are now expected to make.
The best way to keep your monthly mortgage payment low is to make sure you have a large down payment, as this means that the total debt you have is lower and your interest rates may be lower as well.
What level of income should I have?
Typically, most mortgage providers will allow people to borrow four to five times their annual salary. This means that for a mortgage on a million dollar house, you may need a salary in the region of $200,000 to $250,000. Of course, this will depend on the loan amount – if you have a large down payment, you will be borrowing less and you can get a smaller loan from a mortgage lender.
The other thing to consider is your total household income. If you are looking at buying a million dollar home with a partner, spouse, or other people you live with, you will find that all your combined salaries are counted for the loan amount you are eligible for. You can also consider any passive income you have.
What if I am self employed?
It can be harder to get a mortgage loan for real estate when you are self employed or run your own business, but it is not impossible. Mortgage lenders will need to see proof of your income for several years before the point where you apply for the mortgage. This is again to make sure that they know you can afford the mortgage payments, similar to how any other home buyers have their salary looked at. If you are struggling to get a mortgage while being self employed, you may be able to find a mortgage lender that specializes in mortgages for self employed people – these lenders may have a mortgage rate that better suits your circumstances.
Consider your other costs
The other important factor in making sure you can pay for a mortgage is your debt to income ratio. Looking at your total debts compared with your income can show what you can afford. Other debts such as car loans, savings account fees, overdrafts and other high cost loans, the monthly cost of cell phones, bills, and any subscriptions you have – all of these should be weighed against your household income. If you are unsure whether or not something will make you less likely to get a good mortgage rate (or get a mortgage entirely), you can check your credit score to see what information mortgage lenders will have on you.
How to find good mortgage rates
The best way to find a good mortgage rate is to shop around. There are scores of different mortgage lenders out there who can help you cover the purchase price of an expensive home, and many of them will have special offers or competitive deals. Never rush into getting a mortgage – you might find something in the small print that says your interest payment will go up unexpectedly. Take your time and shop around until you find the best mortgage deal for you. You may also want to look into mortgage insurance if you feel this would be beneficial.
As already mentioned, one of the best ways to get good mortgage rates is to have the largest deposit you can afford – however, you need to remember that you should always have a safety net or emergency saving fund.
It is also worth looking into different mortgage types – you may want a fixed interest rate mortgage, or you may think that a flexible rate mortgage will save you money in the long run. Picking either mortgage type can be something of a gamble, but there is help and advice available to help you pick the right one for you, and hopefully increase how much house you can afford without having to take out jumbo loans.
Can you trade up?
One way that a lot of people manage to afford a 1 million dollar home is to trade up. If you are looking at buying such an expensive home, hopefully your finances are in a suitable situation for you to be able to buy a cheaper home. Many people will start with a cheaper home and home that home price appreciation means their house is worth more than they originally paid for it after a few years. This is a type of investing – investing in real estate. Of course, while this can help people build their way up to an expensive house, it can be risky – real estate prices could drop, leaving you with less value than you put into the property.
While plenty of people manage to increase the value of their property assets this way – increasing the square foot size, amenities, and location, it can be a stressful process. Trading up means that you have to move home repeatedly, and often you will have to deal with property buying chains and deal with other home buyers who may slow down the process. However, it can be very beneficial to work your way up from what you can afford now to what you might be able to afford later.
Think about all the costs
When you are looking at making a big purchase – like a house worth a million dollars – you need to consider all the factors and all the expenses. The ticket price for a house is not the only expense. You also need to consider ongoing costs such as upkeep costs and repair costs – it’s not much good to buy an expensive house if you do not have a cash buffer to repair a broken window. You will also need to consider increased housing costs. If you are upgrading from a smaller house to a larger house, heating bills or aircon bills could be higher. You may also want to have money saved for refurbishments or repairs, homeowners insurance, and homeowner’s association fees. There are of course also other costs beyond the house purchase price, such as closing costs, property taxes, and real estate agent fees.
Property taxes on a million dollar home
Property taxes can add a large chunk to homeownership costs. The median property tax rate is around 1.3% across the US. This means that on a 1 million dollar home you could end up paying around $13,000. This is a significant expense that you should budget for. You should make sure that you are well prepared for all these additional costs before buying an expensive home.
Buying the home of your dreams is an exciting prospect, and it might seem unachievable, but there are things you can do to work towards it. However, you should plan ahead and make sure that you consider all the fees, expenses, and other factors such as your gross income, debts, and credit score. Of course, if you decide that a one million dollar home is beyond what you need, you could look at how to buy a house more within your ideal budget. Ultimately, whatever house you decide to buy, you should plan and research, and you can even talk to a financial advisor for the best chance at making the most for your money.