It’s essential to take into account factors beyond just the sticker price when determining your home-buying budget.
Considering the interest, the monthly mortgage payment will increase substantially unless you buy the house in full.
Moreover, opting for a fixed-rate mortgage allows you to have a clear understanding of your monthly payment and overall home expenses from the start.
This can assist you in figuring out if the payment falls within your limits.
Let’s explore the costs associated with purchasing a $1,000,000 property through different financing options.
Comparing 30-Year and 15-Year Fixed Mortgages
The majority, constituting 75%, of mortgages have maturities spanning 30 years, with fixed rates encompassing over 95% of this category.
As of December 29, 2023, the national average interest rate for such mortgages stands at 6.95%. Conversely, 15-year fixed-rate mortgages exhibit a slightly reduced interest rate, averaging at 6.35%.
Depending on your geographical area and credit rating, your effective interest rate may fluctuate. It’s important to note that the rate quoted to you is not definitive, as your mortgage provider will determine your rate considering various factors, including your credit score and location.
Borrowing $800,000 with different mortgage rates will result in variations in the monthly mortgage payment, total installment repayments, and accrued interest.
Furthermore, it will also influence the amortized cost of the property, encompassing the down payment.
Presented below is a breakdown of both fixed-rate mortgage scenarios.
Variables 30-Year Fixed Rate (6.95%) 15-Year Fixed Rate (6.35%)
Monthly mortgage payment $4,971.69 $5,177.29
Total loan repayment (Installments) $1,789,444.40 $931,913.10
Total interest paid $989,444.40 $331,913.10
Amortized cost of the house (DP + Repayment) $1,989,444.40 $1,131,913.10
While the monthly payment for a 15-year fixed-rate mortgage will exceed that of a 30-year mortgage, potential savings on interest may be realized.
Nevertheless, it’s important to also consider factors such as property taxes and homeowner’s insurance.
Income Threshold for Buying a $1M House
A straightforward method exists for determining your monthly mortgage installment; however, it necessitates three essential parameters: the interest rate, loan duration, and down payment amount.
In the instances provided, we will presume a down payment of 20%, equating to $200,000 on a home valued at $1,000,000.
Consequently, the loan amount would be $800,000, thereby negating the need for private mortgage insurance (PMI).
Typically, it is advisable that your monthly mortgage payment remains within one-third of your total monthly income. Ultimately, the precise amount you are obligated to pay hinges on various factors including your down payment, loan terms, taxes, and insurance.
For a 30-year mortgage, meeting the eligibility criteria for a loan featuring a 6.95% interest rate and a 20% down payment necessitates an annual income of at least $182,153 before taxes.
Similarly, in the case of a 15-year mortgage, earning a minimum annual income of $190,343 before taxes is required to qualify for a loan with a 6.35% interest rate and a 20% down payment on a property valued at $1,000,000.
