A four-million-dollar home is a luxury in most parts of the US. Even inexpensive cities like New York, San Francisco, and Los Angeles, spending 4 million dollars on a home is big. If affording such a luxury home is your dream, you’ll like to know how much you need. So, what salary do you need to afford a $4 million house?
You need around $1 to $1.5 million annual income to afford a $4 million house. Even then, you still have to consider costs such as property taxes, maintenance, and home insurance which will be much higher. Generally, you should have a net worth of at least $12 million before buying such a home.
However, if you’re among the top 1% that can afford the property, it’s important to determine if a $4 million is worth it. Depending on some factors, including locations, it could be. Here, we discuss how much you should be earning to afford a 4 million dollar house.
How to Qualify for Mortgage for a $4 million home
When buying a house, it’s a rule of thumb that you shouldn’t spend more than three times your gross income. Thus, you’ll need a gross income of about $1.4 million annually for you to qualify for a mortgage for a $4 million home. You’ll also need a down payment of at least $800,000 (20% of $4 million) for you to qualify for the mortgage.
Another option is to use the 28/36 rule in determining if you can afford such a home. The rule states that housing expenses which include payment of principal and interest on the mortgage, private mortgage insurance payments, and annual property taxes, shouldn’t be above 26% of your total pretax income. In addition, your total debt shouldn’t also be more than 36% of your pretax income. Thus, housing expenses plus other debts such as credit cards, personal loans, car loans, student loans, and other monthly debt payments will continue for 10% months or more.
How to afford a $4 million house
You’ll need to be earning well over a million dollars annually for you to afford a $4 million home, and you must be certain that your income is consistent for the next several years. Even with that, it also helps to have a buffer in case things go south briefly so that you can still afford to pay the obligations on your mortgage. Generally, you’ll need the mortgage for $3.2 million after paying the down payment of $800,000. Depending on your interest rate and how long the loan duration is, you’ll be paying between $200,000 to $300,000 as yearly payments on the mortgage before paying taxes.
Of course, you have other expenses too necessary for your daily living. Asides from that, you may have other debt obligations you’ll have to fulfill. Following the 28/36 rule, you’ll have to earn over a million annually to be able to afford such a house. Earning over $1 million annual salary doesn’t necessarily mean that your base salary is that amount. In most cases, it’s not. But if your income, when you include commission, stock grants, year-end bonuses, and lots of other benefits, all amounts to over a million, then you can go ahead and buy a 4-million-dollar home. Of course, you also need to consider whether such bonuses and other benefits are consistent and not just something you get occasionally.
Purchasing a house is a major decision that could have a significant effect on your finances for more than a decade. In addition, the length of the mortgage will usually be between 15 to 30 years. Thus, it’s important to consider your monthly income and other expenses to know you can afford to pay the mortgage in the loan.
What To Consider When Buying A $4 Million Home
Apart from the mortgage, there are other costs you have to consider when you plan to buy a house this costly. That includes:
1. Cost of Property Taxes
Beyond the mortgage, there are other incidental costs to owning a multimillion-dollar property. One of them is property taxes. This differs based on the state where you’re buying the property. Illinois, Texas, and New Jersey have the highest property taxes, while Hawaii has the lowest. For a 4-million-dollar house, your property tax could be close to $100,000 annually, depending on where the property is.
You don’t spend the same amount maintaining a 400,000 house and a $4 million property. There are huge differences in this cost from heating, renovation and repairs, cleaning, landscaping, and more. You can expect to spend close to 10x your regular maintenance costs on the property. When you consider that cost annually, don’t be surprised if it’s tens of thousands. Just as you’re spending on maintenance, you’ll also be spending more on utilities. You’ll also have to furnish such property on a grander scale, and if you don’t live there permanently, that’s an extra cost for not renting it out.
3. Home Insurance
It’s very important to ensure every property you own, and when it comes to property as valuable as a $4 million home, home insurance isn’t negotiable. But the cost of insurance is usually high for clear reasons. The insurer bears a greater risk and wants to get the best possible premiums. It might be most costly if the house is an area prone to natural disasters such as earthquakes, cyclones, tornados, etc.
What Should Be Your Net Worth to Afford $4 Million House
There are rules of thumb here, such as your primary residence should not be more than 20 to 30% of your net worth. In that case, you need to be worth between $12 to $20 million to afford such a property. While that’s ideal, you don’t necessarily have to be worth that much before you make the purchase. Since the value of the home decrease with time, you can conveniently buy a property worth $4 million even before reaching that net worth. But you should at least be close to that range, and after buying the property, your net worth will likely increase with time, which also means that the percentage of it that is your house value will reduce.
Is A $4 Million House Worth It
If you have a family with kids, a $4 million house could seem like a nice thing for you and your family, especially if you can afford it. But it’s a tough decision to make nonetheless. Most times, it’s not necessary, especially if your net worth isn’t over $12 million. Also, it depends on which type of home you’re upgrading from. For example, it might be pretty great if you’re moving from a $2 million house to a $4 million house. But moving from a condominium or studio to a $4 million home might be unadvisable.
A four-million-dollar home requires you to be making well over a million annually. Even in the US, which has the highest number of millionaires globally, the percentage of the population that earns that much is quite low. But it’s a dream worth having, and if you can afford it, it could be nice as long as you consider the financial consequences.