Thinking about buying a $1 million home? It sounds glamorous — and maybe a little intimidating.
According to Fortune, $1 million can still buy you a lot of house in most parts of the United States, as the median home sale price was $419,200. But before you start daydreaming about that perfect kitchen or backyard oasis, it’s worth figuring out what kind of paycheck you actually need to afford that price tag without breaking a sweat.
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GOBankingRates spoke with Brett Iwanowicz, the founder and CEO at Brett Buys Roc Houses, to break down the numbers so you know what salary you should be aiming for to comfortably call a million-dollar house your home.
“The ability to purchase a $1 million home depends on multiple elements which include personal income levels along with debt-to-income ratio and down payment requirements and interest rates and total financial responsibilities,” said Iwanowicz.
The following analysis also includes the minimum annual income needed to maintain a $1 million home purchase. Here are some key factors to consider.
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Down Payment
According to Iwanowicz, a common rule for homebuyers involves putting down 20% of the property value which amounts to $200,000 for a $1 million home.
The majority of buyers need private mortgage insurance (PMI) to get approved for mortgages that require less than 20% down payment.
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Loan Amount
“A $800,000 loan amount will result after making a $200,000 down payment,” Iwanowicz explained.
The mortgage payment amount each month depends on both the interest rate and the duration of the loan (30-year fixed or 15-year fixed).
Interest Rate and Monthly Mortgage Payment
Iwanowicz noted the interest rate stands at 6% per year in this example for a 30-year fixed mortgage.
“An $800,000 mortgage at 6% interest with a 30-year term results in a monthly principal and interest payment of about $4,800,” he added.
This also means that the calculated amount does not include payments for property taxes together with homeowners insurance and homeowners’ association (HOA) fees.
Property Taxes and Insurance
“Annual property tax rates typically range between 1% to 2% of the home’s total value,” said Iwanowicz.
He explained that a $1 million home would require $10,000 to $20,000 annual property taxes which equals $833 to $1,667 monthly payments.
And the cost of homeowners insurance varies between $100 to $300 per month based on location and coverage.
Total Monthly Housing Costs and Income Needed
Monthly housing expenses combining mortgage payments and property taxes and insurance would fall between $5,733 and $6,767, according to Iwanowicz.
As far as income needed — he said the recommended limit for housing expenses in relation to gross income stands at 28% to 30%.
Using this guideline, to afford $6,000 monthly housing expenses you would require a gross monthly income exceeding $20,000.
“This translates to yearly earnings of $240,000,” Iwanowicz concluded.
Debt-to-Income (DTI) Ratio
Here, the lender evaluates the total DTI ratio of buyers, which combines every monthly debt payment including car loans, student loans and credit card debt.
Iwanowicz explained that most lenders prefer a DTI ratio below 43%. With a yearly income of $240,000 ($20,000 per month) the buyer’s total monthly debt payments including mortgage should not exceed $8,600.
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This article originally appeared on GOBankingRates.com: I’m a Real Estate Expert: The Salary You Need To Afford a $1 Million Home
