Whoah, that’s crazy! I can hear some of you who don’t live in an expensive part of the world say. Meanwhile, some of you are surely thinking you can’t get anything livable with a $1 million mortgage. The ideal mortgage amount of $1 million is based on the premise that the ideal income for maximum happiness is $200,000 per person.
Back in 2002, a $1 million mortgage cost around $50,000 to $65,000 a year in interest expense given mortgage rates were 5%-6.5% for a 5/1 ARM or a 30-year fixed. Multiply the annual interest expense by three, and you get $150,000-$195,000, the minimum annual income recommended to take out such a loan.
Today, a $1 million mortgage costs around $22,500 to $35,000 a year in interest expense given mortgage rates are now 2.25%-3.5% for a 5/1 ARM or a 30-year fixed in 2015. Multiply the annual interest expense by three again and you get $67,500 to $105,000, a far cry from the $150,000-$195,000 you originally needed to make! Note, banks still only lend out 3-4X your income despite a drop in rates.
It is aggressive to think that someone who only makes $79,500 a year in gross salary can afford a $1 million mortgage, but it’s also absurd that one can borrow $1 million dollars nowadays for only 2.625%! I’m not recommending everyone with impecable credit scores, great financial habits, and steady savings rates all get $1 million mortgages. I’m just saying that it’s now possible for someone making $79,500 a year to service $1 million worth of debt at 2.625% if the bank approves.