Buying a million-dollar house isn’t as outlandish as it seems. There are several markets across the country where the median home price falls near or above $1 million.
If you are looking to buy in San Francisco, you can expect to pay around $1.57 million for a house in 2024, while Bellevue residents near Seattle pay $1.6 million on average.
As home prices climb, more people are asking: what is the mortgage on a million-dollar home, anyway?
The answer depends on a variety of factors, including your down payment and current interest rates. Use this guide to prepare to buy your future home, whether it costs a million dollars or more.
Calculating the Down Payment on a Million-Dollar Home
The first step when looking at any mortgage is to estimate your down payment. The more money you can provide upfront, the smaller your monthly mortgage payment will be.
There’s a common belief that you need to put down at least 20% of the home’s value when securing a mortgage, which would be $200,000 for a million-dollar home.
However, you might find lenders who are willing to grant loans for less than the 20% threshold. This is particularly true if you are buying a house in an expensive market.
The FHA Can Approve Million-dollar Loans
The Federal Housing Administration (FHA) is designed to help people become homebuyers with fair loan rates. You might be able to work with the FHA to secure a loan with a low down payment in a high-cost-of-living area.
The vast majority of counties have limits of $766,550 for FHA loans. This means you would need a 24% down payment on a million-dollar home to qualify. However, there are loan exceptions for some parts of the country, so check the FHA Loan Limit Map to see if your region qualifies.
Cities like Boston, Nashville, and Denver have loan limits of up to $950,000 while other regions have even higher caps. Los Angeles, Washington, D.C., and the state of Hawaii have loan caps near $1.15 million.
These caps highlight how hard it is to find housing for less than $1 million in some parts of the country. You might be able to buy a house with a down payment of less than 5% if you qualify for an FHA loan.
Budget for Private Mortgage Insurance
If you aren’t able to put together a 20% down payment, you will need to pay private mortgage insurance on the loan. This is an extra fee to your lender that they build into your monthly payments. You will pay PMI until the loan is less than 80% of the home’s value.
PMI costs between 0.5% and 1.5% of the original loan over the year. If you have a 10% downpayment and need a $900,000 loan, then your PMI will fall between $4,500 to $13,500 annually or $375 to $1,125 monthly. You might be able to find favorable PMI rates by shopping around with different lenders.
If you are buying in a hot market, your home values could increase after you move in. Within a few years, you could schedule an appraisal to see how your home’s value has appreciated. If your loan is less than 80% of the home’s estimate, your lender might cancel your PMI.
Interest Rates Affect Monthly Mortgage Payments
Your down payment is only the first factor that determines how much your monthly payment will be on a house that costs a million dollars. The next factor – and one of the most important ones – is the interest rate.
Even a 1% difference in interest can have a significant impact on your loan cost and mortgage payments. One example looked at the interest paid on a $300,000 loan at two separate rates.
A homeowner with a 3.5% interest loan would pay $184,968 in interest across a 30-year term. A homeowner with a 4.5% interest loan would pay $247,220 in interest. That’s $62,000 more from one loan to the next and increases the monthly payment by $173.
If you are shopping for a large mortgage, pay close attention to interest rates. The Federal Reserve frequently updates consumers on expected changes to interest rates, so you might decide that it makes more financial sense to wait a few months before buying.
Macroeconomic trends can affect interest rates, but so can your personal finances. Shop around at different lenders to get favorable rates and see how much you can save. You can also lower your interest rates by improving your credit score, making a larger down payment, and increasing your income to make your mortgage payment a smaller part of your debt-to-income ratio (DTI).
Mortgage Term Variations
You can also work with your lender to reach favorable mortgage term variations that reduce your monthly payments. These variations reduce the risk to the lender, which can lower your interest rate. For example, a 15-year fixed-rate mortgage will cost less in interest than a 30-year mortgage. The bank can recoup its loan faster, which means there is less risk that it will lose money from your missed payments.
You can also explore different mortgage types to see how your monthly payments might change. For example, an adjustable-rate mortgage (ARM) basis the monthly payment on the current national interest rates. When rates decrease, your monthly payments decrease.
When they increase, your monthly bill goes up. If you are buying a house during a period of high interest rates, you might decide that getting an ARM is worth the risk. While you might have to pay more in some months, there is potential to save money in the long run.
Know your options when shopping for mortgages. The interest rate isn’t the only factor that determines their cost and you can explore various options to get affordable terms for your mortgage.
Additional Costs to Consider
Whenever you are buying a house, regardless of the cost, you should have a clear picture of how much house you can afford. Most lenders will not approve loans that exceed 36% of your monthly income. Some lenders target an ideal DTI of 28%, which gives you even less flexibility with your mortgage.
Your lender will ask about any recurring debts you have – like your student loans, car payments, and monthly costs like home insurance – when estimating your maximum loan size. They need to understand how risky the potential loan is, which refers to how likely you are to miss payments.
Once you have an idea of your maximum monthly payment amount, you can make sure you can afford your dream home. Along with your mortgage and interest costs, here are a few other expenses to keep in mind.
Property Taxes
Property taxes vary widely by state. Hawaii has notoriously high home prices but the lowest property taxes as a percentage of the home value. Meanwhile, New Jersey has both high home prices and high property taxes.
Check the state you plan to live in to estimate your property taxes. You can also look into homestead exemptions to see if your house qualifies for any tax breaks.
Homeowners Insurance
Every insurance company has its own formula for calculating coverage rates. On average, the insurer will estimate how much it costs to rebuild your house if it gets destroyed and how likely it is to be damaged. A large beachfront property will have higher home insurance rates on average than a bungalow in a land-locked state.
Talk to different insurers to estimate the monthly cost to protect your million-dollar home. Add this to your budget as you map out your housing expenses.
Homeowners Association (HOA) Fees
Before you start looking at houses, decide whether you want to live in a community with a homeowners association and how much you are willing to pay to do so. HOA fees vary by community, but most people pay around $191 per month to join. Some HOAs are optional while others are mandatory.
If you are looking at luxury homes, you can expect HOA fees to be higher. One San Francisco apartment complex recently made headlines for its $1,114 monthly HOA fee even though the units themselves only cost $475,000.
Utilities
Utilities aren’t optional for homeowners. While you can limit your air conditioning use in the summer and try to conserve water with rain barrels, you will need to set aside funds for these expenses.
The average American spends $1,644 annually on electricity, $540 on water, and $1,416 on cable and internet. Your costs will depend on your region, your use, and your home. A million-dollar apartment in New York City will have lower air conditioning needs (and therefore electricity costs) than a million-dollar five-bedroom house in Florida.
These properties will also have different water bills if the Florida home has a pool and a sprawling yard that needs to be watered.
Ask your Realtor to provide utility bill estimates for the houses you look at. This will help you gauge what your monthly costs will look like.
Maintenance
The final expense to calculate when buying a house is your maintenance costs. As a rule of thumb, budget one percent of the home’s value for maintenance each year. For a million-dollar house, this means setting aside $10,000 or $833 per month.
There are plenty of months when you won’t use this savings; however, you will be happy that you have it when you need it. For example, you might need to replace a water heater or install a new HVAC system which covers several months’ worth of maintenance savings.
There are also optional upkeep costs to keep in mind. You might want to upgrade your stove or refrigerator if the current ones are wearing out. You might want to repaint your living area or replace the dated carpet once you move in. Consider setting aside a renovation budget so you can make these improvements instead of putting all of your money into the down payment.
Breakdown of a Mortgage on a Million-Dollar Home
There are multiple mortgage calculators online that can help you break down your monthly payment based on your current financial situation. You can also meet with a lender to pre-qualify for any loans.
Most lenders will tell you the maximum loan amount they will authorize and the maximum monthly mortgage payment you can handle. Even if you think you can afford more, listen to your lenders. You can always pay ahead on your loans if you have extra cash.
Here is an estimate of what your mortgage payment will look like on a million-dollar home.
- Home cost: $1,000,000
- Down payment: $100,000
- Loan amount: $900,000
- Interest rate: 5%
- Loan term: 30-year fixed rate
- Principal and interest: $5,368
- Private mortgage insurance: $9,000 annually, $750 monthly (1% estimate)
- Cost before taxes, homeowners insurance, and HOA: $6,118
Using this example, it’s likely that the homeowner would pay close to $7,000 if not more on their million-dollar home once all of the expenses were calculated. They would be able to significantly reduce their monthly costs by saving for a larger down payment (eliminating PMI) and looking for properties that do not have HOAs in areas with lower property taxes.
For many buyers, the mortgage on a million-dollar home is worth it. They get to live in their desired cities and have enough space to relax, raise families, and potentially work remotely. With the right budgeting and annual income levels, these homes can be affordable without stressing the finances of the buyers.
Best Ways to Buy a Million-Dollar Home
Once you walk through the financial considerations to understand the mortgage on a million-dollar home, you can start the home search.
Meet with a real estate agent and tell them your budget. You can also show them any pre-qualifications from lenders if you need to get a home loan. This proves that you are serious about looking for properties in the price range.
When shopping for high-value properties, make sure you hire a Realtor who has experience supporting clients at your level. You can still negotiate on million-dollar homes and bring the price down if the seller is willing. This can reduce your loan amount and give you a more favorable monthly payment.
Interview at least three real estate agents before hiring the best one. Ask detailed questions to understand their experience and qualifications to support your home purchase. Your agent should be able to recommend neighborhoods without houses in your price range and shouldn’t push you to spend outside of your comfort zone.
To find a Realtor in your area, turn to FastExpert. Read agent profiles and find professionals who are used to handling purchases at your price point.
Set a Monthly Payment to Buy Your Million-Dollar Home
Knowing how much house you can afford is an essential part of any real estate purchase process. Understand your ideal monthly mortgage payment and whether you want to pay HOA fees on top of it. Financial clarity will help you make strategic decisions throughout the purchase process.
To start the home search, meet some of the Realtors in your area. Choose an agent who you will feel confident working with from the first home tour until the closing appointment.
FastExpert allows you to learn about Realtors without asking them to contact you, so you have control over who you meet with. Take the first steps toward finding your dream home today with our help.