You should make about $200,000 annually to safely afford the mortgage and other necessary costs of owning an $800,000 home. Read on to learn more about the costs of owning an $800k home and how to afford one.
hash-markHow to Afford a $800,000 Home
- Consider How You'll Purchase the Home
- Qualify for a Mortgage
- Save for Closing Costs
1. Consider How You'll Purchase the Home
The first step to affording an $800,000 home is to secure financing. If you plan on paying cash, this step is simple – just save $800,000 and buy the home outright. However, the vast majority of people will need to obtain financing first.
2. Qualify for a Mortgage
The next step to purchasing an $800k home is getting a mortgage. Most borrowers purchasing an $800,000 home will likely go for a conventional mortgage from a traditional lender such as a bank or credit union. With a loan that large, lenders will want to see a solid financial profile, which means a credit score of at least 620 and enough income to safely cover the mortgage payments.
FHA Loan
You may also consider an FHA loan which only requires a 580-credit score and a minimum down payment of 3.5%. However, the limit for FHA loans on a single-family home is also $726,200 in most areas, which may make it difficult to obtain a loan if you plan on making a lower down payment. But the limit is $1,089,300 in Alaska, Hawaii, and other high-cost areas. So, an FHA loan may be a great option if you live in one of those areas.
VA & USDA Loan
VA and USDA loans are also an option for veterans and rural homeowners and offer 0% down payment options and lower credit requirements for those who qualify.
3. Save for Closing Costs
You must save at least 20% for a down payment or $160,000 to avoid private mortgage insurance. Keep in mind that a loan amount above $726,000 is considered a jumbo loan. So, if you plan on putting down less than a 10% down payment, you may be subject to stricter requirements.
hash-markCost to Own a $800,000 Home
- Biggest Cost: The primary cost of owning a home is the mortgage payment.
- Mortgage Payment Factors: Your mortgage payment is influenced by your risk profile, which a lender assesses to determine your interest rate.
- Average Interest Rate: The average mortgage interest rate in the US for a 30-year fixed-rate loan is approximately 7.3%.
- Down Payment: If you make a 20% down payment on an $800,000 home, the down payment amount would be $160,000.
- Loan Amount: With a 20% down payment, the total loan amount would be $640,000.
- Monthly Mortgage Payment: At a 7.3% interest rate, the monthly mortgage payment for a $640,000 loan would be $4,388
hash-markMortgage Payments for $800k Home
According to many financial experts, your mortgage payment should not exceed 28% of your income. So, if you make $200,00 per year, then your monthly income would be $16,666.67, and 28% of that would be $4666.66, leaving you a comfortable cushion to afford other expenses. You might receive a lower interest rate if you have a higher credit score or can make a larger down payment. But if you make $200,000, you could safely afford an $800,000 home.
You might also consider a 15-year fixed rate mortgage, which would require a $5,860 down payment at 7.3%, in which case you would need to make at least $250,000, but you would pay off the loan in half the time.
hash-markProperty Taxes for $800k Home
Taxes are another cost to consider, which will vary depending on where you live. But the average effective property tax rate in the US is around 1.11% or about $8,800 per year for an $800,000 home.
hash-markMaintenance and Upkeep for $800k Home
You should also consider routine maintenance and upkeep, which will also depend greatly on the size of the property and where it's located. However, a good rule of thumb is to save about 1-2% of the home's value every year to pay for maintenance – or about $8,000 to $16,000 for an $800,000 home.
hash-markRecommended Net Worth to Afford an $800,000 Home
A comfortable net worth to afford an $800,000 home is about $400,000. Most financial experts recommend investing no more than 30-40% of your net worth into your home's equity. So, if you plan on making a 20% down payment of $160,000, you should have a net worth of about $400,000 or more.
Lenders will want to see that you have other assets beyond what you're investing in the home to ensure you have a comfortable financial cushion in case you suddenly cannot work if there is a downturn in the economy. Those assets could include savings, retirement accounts, rental properties, etc. Although you could have a lower net worth with a higher income, $400,000 is a comfortable amount to afford an $800,000 home.
hash-markShould You Buy an $800,000 Home and Up?
Yes, only if you have a household income of $200,000 and a net worth of $400,000 and up. If you have these funds, purchasing an $800,000 home is a smart investment that will likely pay off in the long term. However, if you are not quite there with your finances, investing in a less expensive property and working your way up or renting until you're ready to afford your dream home may be smarter. While owning property is usually a smart investment, you don't want to put yourself in a situation where you struggle to make your monthly mortgage payment.
hash-markBuying an $800,000 Home Bottom Line
Buying an $800,000 home can be a great feeling, and in almost any area, it will afford you a comfortable property. However, purchasing a home is a major responsibility, so before committing, you should take stock of your finances and ensure you can realistically afford the associated costs. Beyond the mortgage payments, you need to consider property taxes, homeowners insurance, maintenance, and potential homeowners association (HOA) fees.
It's also wise to have a financial buffer for unexpected expenses, such as emergency repairs or changes in your financial situation. Thoroughly understanding all the costs involved and planning accordingly will help you enjoy your new home without financial stress. Homeownership can be a rewarding experience, providing stability and a sense of accomplishment, but careful financial planning is essential to make the most of this significant investment.
