How to afford a million-dollar home

headshot of writer Tony Huynh
Tony Huynh
November 21, 2024
A luxury home with a brick driveway.
Ever caught yourself daydreaming about living in a million-dollar home, only to dismiss it as a far-fetched idea? Well, contrary to popular belief, owning a million-dollar abode isn't just for the super-rich. 
If owning a million-dollar home is one of your life goals, you’re not alone. With some clever planning, a sprinkle of financial savvy and a pinch of determination, you may turn that dream home into a reality.We’ll examine what it takes to afford a million-dollar home, including annual income, mortgage payments and other ownership costs. While learning how to afford a million-dollar home, you’ll also see the unexpected costs, tax implications and possible advantages of buying a million-dollar vacation home.

What annual salary do you need to afford a million-dollar house?

To comfortably afford a home valued at $1 million, financial experts recommend an annual salary between $269,000 and $366,000This range, however, is subject to variation depending on your:
  • Annual income
  • Debt-to-income ratio (DTI)
  • Credit score
  • Available down payment
  • Current interest rates 
A graphic shares five factors that affect the type of mortgage you can afford.
It’s crucial to consider these factors to determine your financial ability to manage a mortgage on a $1 million home. Your income may ultimately decide if you rent or buy the home.
Example: If you put down  20% ($200,000) and have few monthly expenses, you can likely secure a mortgage with a good interest rate (say, a 30-year fixed-rate mortgage at 7%). This would bring your monthly mortgage payment to about $5,300 before factoring in property taxes and homeowners insurance.
Even if your after-tax earnings are $200,000 annually, that’s still a quarter of your income going just to principal and interest. If your credit is low or your down payment isn’t as high, expect the monthly cost to be substantially more.With a 20% down payment, typical closing costs can be more than 2%, meaning an additional $16,000 on top of the $200,000 you’ll put down. That initial payment, DTI and credit score will determine your monthly mortgage.

Expected and unexpected expenses of owning a million-dollar home

It’s important to plan for expenses beyond the mortgage. Here are a few things to factor in: mortgage insurance, property taxes and possible HOA fees.Although mortgage insurance isn’t always necessary, your lender may require it if you supply a low down payment. If you put less than 20% down on a home, most lenders require private mortgage insurance (PMI). This can cost over 1% of the value of your loan. If you put down $200,000, you would likely need to pay an additional $375 monthly for PMI. Property taxes are also an important factor to consider. Rates are set by local jurisdictions so check with your real estate agent. The average national property tax rate is about 1%, so an extra $10,000 per year, or $833 per month, for a million-dollar home. If your neighborhood has a homeowners association (HOA), you’ll be charged monthly HOA fees on top of your mortgage. HOAs have additional regulations and codes agreed upon by neighbors. You may also need to seek approval for certain projects or renovations.In addition to the expense above, consider the cost ofIt’s important to know what to expect so you can factor all expenses into your finance plan.

Tax implications of a million-dollar home

You might not anticipate how your new home will affect your income taxes. For example, you can lose potential tax savings if your mortgage interest exceeds the current deduction threshold.The mortgage interest tax deduction has a limit of $750,000, which means that if you put down less than $250,000, you will incur “lost” tax savings each year until your principal loan balance drops below $750,000.If you decide to rent out your $1 million second home, you won’t be able to claim the mortgage interest deduction, but you could end up with tax-free rental income due to the various deductions for landlords. However, this can be a complicated adjustment, and finding renters and managing a rental — or short-term rental property — can be a hassle.

Financing strategies: How to buy a million-dollar house

Financing a mortgage on a million-dollar home doesn’t have to be stressful. In fact, there are three financing strategies available for those who have the income for a million-dollar home.
A graphic shares three million-dollar mortgage financing options.
Paying interest on a large loan may seem intimidating, but with these financing tools, you’re one step closer to your million-dollar dream home. 

Large down payments

Paying a larger down payment upfront can help you minimize the amount of interest you’ll pay on your principal. Although 20% is generally expected by lenders, providing more can help make your bid more competitive and potentially lower your mortgage payments.

Jumbo mortgages

If your home’s price exceeds the conventional loan limits set by your state — generally over one million dollars — you may require financing via a jumbo loan. These non-conforming loans may require a down payment of as little as 5% and are not subject to limits set by Fannie Mae or Freddie Mac. Check with your county and lender to see if you qualify for a jumbo mortgage.

Home equity loans

A home equity loan and a home equity line of credit (HELOC) may help current homeowners pay for a mortgage on a million-dollar house. These financing tools work by leveraging the equity of your primary residence as a means of financing when buying a second home.

Simplified ownership of a million-dollar second home

And what if your million-dollar dream home is for vacations, not your primary residence? Those are hefty expenses for a home that you won’t use year-round. This is why many second home buyers are opting for co-ownership.
A graphic shares three perks of owning a million-dollar vacation home.
Pacaso offers a modern way to buy a million-dollar second home. Our LLC model lets you co-own a luxury second home for as little as one-eighth of the home’s price, increasing your buying power and allowing you to own more house for less money. Pacaso takes care of the home’s maintenance, bill payments and management.

Co-ownership

Prospective second home owners are embracing Pacaso’s fully managed LLC co-ownership model. It offers the benefits of real estate ownership at a lower cost than whole home ownership and without property maintenance and management hassles. Thanks to our transparent pricing model, you won’t be surprised by added expenses. And with our banking partners, Pacaso offers buyers access to a competitive-rate mortgage for up to 70% of the home’s share price.You can easily and equitably book time in your home two days to two years in advance. Pacaso homes are used exclusively by owners and their guests and are never get rented. And each owner has their own secure storage space in the home, so packing is minimal. Check out our listings and learn more about how Pacaso can help you own the million-dollar home of your dreams. Learning how to afford a million-dollar home means keeping expected and unexpected expenses in mind, simplifying ownership responsibilities and finding the best financing strategies that work for your financial goals.

How to afford a million-dollar home FAQ

01: Is now a good time to buy a million-dollar home?

Your readiness to buy a million-dollar home depends on your personal finances.

02: How much do you need to make to afford a million-dollar home?

The annual income to afford a million-dollar home is between $269,000 and $366,000.

03: What is a good down payment for a 1 million-dollar house?

In general, a 20% down payment is recommended. Putting 20% of the home price down for a million-dollar home results in a $200,000 down payment.

04: What are the benefits of buying a million-dollar house?

Some benefits of buying a million-dollar house include potentially profiting from value appreciation and the ability to retire there when you’re ready to do so.

05: What is the 28% rule?

The 28% rule refers to the percentage of your gross monthly income you should consider spending on your housing costs. According to this rule, you should only use 28% of your salary for million-dollar home purchases.

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