How to afford a million-dollar home

Published Date: November 13, 2023

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If owning a million-dollar home is one of your life goals, you’re not alone. Let’s examine what it takes to afford a million-dollar home, including annual income, mortgage payments and other costs of ownership.

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

Salary for a $1 Million Home Purchase: To comfortably afford a home valued at $1 million, financial experts recommend an annual salary between $100,000 and $225,000. This range, however, is subject to variation depending on syour debt-to-income ratio (DTI), credit score, the size of your down payment, and the current interest rates. It's crucial to consider these elements to determine your financial ability to manage a $1 million mortgage.If you make a 20% down payment ($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 2.75%). This would bring your monthly mortgage payment to about $4,100, before things like property taxes and homeowners insurance are factored in.Even if you make $200,000 annually, that’s still a quarter of your income going just to principal and interest. If your credit is worse 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’re already putting down. That initial payment, along with your 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.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 $200k down, you would likely owe an extra $375 each month. If your neighborhood has a homeowners association, you’ll be charged HOA fees each month. HOAs have additional regulations and codes agreed upon by neighbors. You may also need to seek approval for certain projects or renovations.Property taxes are also a factor. The average national property tax rate is about 1%. That makes for an extra $10,000 per year, or $833 per month, for a million-dollar home. All homes, even million-dollar homes, require maintenance, insurance, and property management. It’s important to know exactly what to expect so you can factor those costs into your finance plan.

Tax implications of a million-dollar home

What you might not expect is how your new home will affect your income taxes. 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 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 entitled to landlords. However, this can be a complicated adjustment, and finding renters and managing a rental property can be a hassle. 

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 won’t be used year-round. This is why many second home buyers are opting for co-ownership.Pacaso offers a modern way to buy a million-dollar second home. Our LLC model lets you  own a luxury second home for as little as one-eighth of the home’s price, increasing your buying power and giving you the chance to own more house for less money. Pacaso takes care of the home’s maintenance, bill payments and management. Peridot is a good example: The mountain contemporary home in Tahoe is valued at $1.25 million, with a 1/8 share available for $209,000. With a 50% down payment ($104,500), the monthly mortgage is $348, plus $1,186 per month for operating costs, including taxes, utilities, maintenance and insurance.Prospective second home owners are embracing Pacaso’s fully managed LLC co-ownership model. It offers the benefits of true real estate ownership at a lower price point than whole home ownership, and without the hassles of property maintenance and management. You won’t be surprised by added expenses, thanks to our transparent pricing model. And with our banking partners, Pacaso offers buyers access to a competitive-rate mortgage for up to 50% of the home’s purchase 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 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 a co-ownership LLC can help you own the million-dollar home of your dreams. 

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