The ideal mortgage amount was $1,000,000 before the Tax Cut & Jobs Act was passed for 2018. Today, the ideal mortgage amount is $750,000, if your income can afford it.
The reason why $1,000,000 was ideal was because that was the mortgage limit for where you can write off the interest. Today, that ideal mortgage amount is $750,000 because $750,000 is the maximum mortgage you can take to be able to write off the mortgage interest.
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.
In 2023, a $1 million mortgage costs around $40,000 – $62,000 a year in interest expense given mortgage rates are now 4% for an ARM and 6.2% a 30-year fixed. Interest rates plummeted to all-time lows in 2020 due to coronavirus fears. However, interest rates rockets in 2022 after the Fed aggressively hiked rates.
Mortgage rates should decline again as inflation peaked in mid-2022. As a result, I'm still very positive on the housing market long term. If you plan to own a property for more than five years, I would buy. The housing market is softening and more deals will be had through 2024.
Reasons Why The Ideal Mortgage Is $750,000
Here are the reasons why the ideal mortgage amount shouldn't surpass $750,000. You can obviously get a much large mortgage if you wish. It just won't be the ideal mortgage amount.
1) The law says so.
The maximum mortgage where you can write off the interest is $750,000 according to the IRS. In other words, if you have a $1.5 million dollar mortgage that costs $70,000 a year in mortgage interest, only ~$35,000 of the mortgage interest can be deducted from your income. Your tax savings is simply $35,000 X your marginal tax rate.
2) Maximum government subsidy.
The home mortgage interest deduction is one of the largest government subsidies available to all citizens. In an environment when all it seems like the government does is take, take, take, citizens get something tangible and immediate back from the government.
The government helps subsidize your lifestyle and lower your taxes. To not take full advantage of such subsidy is a shame, unless you love paying taxes! Just look at how much government subsidy there is during the COVID-19 pandemic. We've got stimulus checks, enhanced government benefits, PPP loans, and more.
Here's how to calculate the mortgage interest deduction if you have a mortgage amount over the maximum.
3) Keeps you disciplined.
For those who live in expensive cities such as San Francisco and NYC, keeping a $750,000 dollar mortgage limit helps keep you from going overboard and buying too much house. Plenty of regular 4-bedroom houses now cost over $2 million dollars in big cities. By keeping your borrowing to $750,000, you are forced to come up with a bigger down payment.
You might think going the standard 20% down ($400,000) and borrowing $1.6 million is fine, but it is not ideal. You start justifying what's an extra $850,000 in debt at that price versus the ideal mortgage amount of $750,000.
I can assure you that everything becomes more painful the more you borrow. You get less deductions, higher mortgage payment, and more stress.
This is why investing in completely passive real estate crowdfunding investments has gained so much popularity recently. Now investors can access property all over the country much more efficiently. Investors in real estate crowdfunding can earn income 100% passively in a diversified way.
4) Asymmetric risk and reward.
In America, when you borrow a ton of money from a bank and can't pay it back one day, you don't get stoned to death. Instead, you hand back the keys to the bank. After all, your bank agreed to take on your home as collateral in case of non payment.
If you are lucky to live in a non-recourse state, the bank can't go after your other assets! If you live in a recourse state, then a short-sale or foreclosure will temporarily slaughter your credit score for 3-7 years. Better your credit score then your private parts right?
Meanwhile, if you happen to invest in the right cycle, you can make a massive amount of money when you finally sell or rent the property out. Further, you don't have to give the bank any of the upside! Isn't America great?
5) You make closer to the ideal income.
In the past, how much mortgage interest you can fully deduct is based on how much money you make. Make too much, and your mortgage interest deductions get phased out. Make too little, and you will feel the strain of the mortgage payments.
If you or your household make between $250,000-$300,000, you are in the sweet spot to take on a $750,000 dollar mortgage. This is because you shouldn’t spend much more than 3X your annual income on a home after putting 20% down. This is my 30/30/3 rule for home-buying.
In expensive big cities like San Francisco, New York City and elsewhere, you may have to stretch to 5X your annual income. However, if you do, just make sure you have rock-steady employment and a good financial cushion. Buying a home that's 5X your annual income is a function of low mortgage rates and future income growth.
The Ideal Mortgage Amount Differs For Everyone
If you live parts of the country which have wonderful $500,000 homes, then awesome! There is never a need to borrow $750,000. The standard deduction of $12,550 for singles and $25,100 for married couples in 2021 is probably good enough for most.
For those of you who live in expensive coastal cities, then consider $750,000 as the cap on how much you should borrow to purchase your primary residence.
Once done, consider taking advantage of investing in lower cost areas of the country through real estate crowdsourcing. You goal should be to diversify your real estate investments and take advantage of long-term trends. As a San Francisco property owner, I'm actively trying to buy heartland real estate.
Some of you reading this have liquid assets north of $1 million dollars. A $750,000 mortgage is therefore nothing to be afraid of because everything is just accounting.
Always Take Advantage Of Low Mortgage Rates
Your goal in this low interest rate environment is to minimize your debt interest expense by refinancing your mortgage. You should also maximize your government subsidies with the ideal mortgage amount.
Imagine refinancing your mortgage to 2.5% while making a 2.5% or greater return on your investments? You're essentially borrowing money for free and then some!
Don't be afraid of mortgage debt. Mortgage debt is one of the best types of debt there is. So long as you can take out the ideal mortgage amount that is right for you, you should do well.
The ideal mortgage amount may change with Joe Biden as president. Perhaps he will do away with the SALT cap deduction limit and raise the maximum mortgage indebtedness amount for deductions. However, we'll just have to wait and see.
Wealth Building Recommendations
1) Shop around for lower mortgage rates
Check out the latest mortgage rates online. You'll get real quotes from pre-vetted, qualified lenders in under three minutes. The more free mortgage rate quotes you can get, the more you can compare and make lenders compete for your business.
2) Invest In Real Estate Online
Real estate is my favorite asset class to build wealth. Take a look at Fundrise, one of the largest real estate crowdsourcing companies today. The platform has over 400,000 investors and runs over $3.5 billion. All you need is $10 to get started.
Real estate is a key component of a diversified portfolio. Fundrise offers diversified funds for investors who want exposure to real estate, mainly in the form of single-family home rentals.
The other real estate investing platform to check out is CrowdStreet. CrowdStreet is a real estate investment marketplace that focuses on individual real estate opportunities in 18-hour cities. 18-hour cities have faster growth and lower valuations.
If you are an accredited investor who likes to build their own portfolio, consider Crowdstreet. However, it's up to you to due extra due diligence on the sponsor before investing in any deal. Understand the sponsor's track record and know their management.
For most people, investing in a diversified fund like the ones offered by Fundrise is the way to go. I've invested $810,000 in real estate crowdfunding so far to diversify my expensive SF real estate holdings. I love being able to earn more passive income so I can spend time taking care of my family.
3) Read the best personal finance book
Pick up a copy of Buy This, Not That, my instant Wall Street Journal bestseller. The book helps you make more optimal investment decisions so you can live a better, more fulfilling life.
4) Subscribe to Financial Samurai
For more nuanced personal finance content, join 65,000+ others and sign up for the free Financial Samurai newsletter and posts via e-mail. Financial Samurai is one of the largest independently-owned personal finance sites that started in 2009.
The Ideal Mortgage Amount is an FS original post. In an inflationary environment, you want to be long real estate. Inflation eats away at the cost of your fixed-rate mortgage while boosting the value of your property.
Hey Sam – love your site and have followed you for many years. Would love your opinion on an upcoming home purchase. Some financial background on us…..my wife and I have a NW of ~ $1.7M, we’re both 36 y/o and I earn $350k/year (she stays home with kids). My job is high stress and I wouldn’t mind leaving some day, so I don’t bank on that level of income for my career. We’re building a $1.1M home in a top school district so that we don’t have to send our 2 kids to private school. We have $225k in home equity that we’ll roll over from our current primary residence, and we have an investment property with $175k of equity that we’ll also roll into the new home that we’re building. So, we’ll be left with a mortgage of $700k. My question to you is would you aggressively pay down that balance if the mortgage is at 3%? I struggle because we have no other debt, so this feels like a massive amount (it is!), but tax effected, it’s about a 2% rate. We have other “after tax” investment accounts with ~ $200k in them, and wondering if liquidate those investments and also apply to the mortgage. I’ve read your FS DAIR post, but would still love your thoughts here. Thanks, and keep up the good work, sir!
How did this workout for you?
Can I afford 1-1.5 million dollar mortgage if I am making 280k a year ? Before taxes
Economist Robert Shiller showed that the national single family home appreciation rate was 1% in real terms from 1890 to 2005. The stock market over the same period returned 6.5% in real terms.
If you invested $100,000 in equities at 6.5%, you would have $661,000 after 30 years. If you put down $100,000 as a down payment on a $500,000 house and that house appreciated at 1% per year, you would have $673,000 after 30 years. That does not take into account mortgage interest, property taxes, insurance, and maintenance costs which will reduce the return well below that of equities.
In addition, putting a lot of money into a single residence is not diversifying risk like investing in a market index. So even if you live in a place where real estate gains outpace equity gains, you are assuming more risk for the same return.
Houses should be treated as the inflation-protected cost of shelter and not an investment for most people. I don’t think your advice is suitable for even those making between $200,000 and $300,000 a year. Such a group would be better served buying less house and investing the rest in equities.
How did population and supply change after 1890-2005? Not comparing apples to apples in a changing landscape. Your message didn’t age well at all with real estate growth since 2018!
I love these updated older posts, the discussions are phenomenal Sam!
Our cost for both rental and primary were almost 1 mil, we put in sizeable down payments and hurled extra money in. It’s down to $650k borrowed now at 4% interest. We might have lost some optimization there haha, we also live in a non recourse state and make right in the sweet spot you exampled.
I wish I’m more of a risk taker! The bankers are having a tough time with such low rates.
If you have a substantial income, have great investments yielding more than you are borrowing, and aren’t concerned about covering your mortgage should things go south, the tax write-off of holding a million dollar mortgage may be good for you. Personally, I’m a fan of not having a mortgage if you can make it work and don’t have the need for a write-off based on the criteria I wrote.
While it might be possible that is one scary financial move. An $800,000 loan would have payments of around $4800 per month depending on taxes and insurances. If you make 100k per year your take home pay is around $6000 after taxes and health insurance. That doesn’t leave much money for food, gas, groceries, investing, etc.
This is ridiculous. It’s no wonder why the average american work until they’re 60s. Take this advice and you’ll surely regret it later as so many have. Among many issues, why in the world would someone spend after tax income only for a tax deduction? It doesn’t matter how much money you make, this is idiotic. I really hope this was for just amusement purposes.
That’s why he said 200K income.
Hi-
Id like to believe this is possible, however having a hard time making the numbers add up. HHI is $325k (including bonus). So about $10k takehome per month (not including bonus). We live in NYC area, and have 400-500k for a down payment. So if we took out a 1MM mortgage for a 1.5MM house, taxes are about 30k/yr. All in thats about 7-8k/month. That only leaves 2k for everything else. That doesn’t add up! Cars/transportation/train/food/insurance/savings list goes on. We’d be so far in the red. I know we’d save a bunch of money on tax breaks from property taxes and mortgage payments, and Im not factoring in the 50k bonus (although really only like 25k). What would make sense here? What size mortgage would be prudent?
Agree. The author is full of it. If I can’t afford such a house, nobody should be able to. And a million dollar house in Silicon Valley or NYC area is probably not much of a house either. A quick trip to Trulia is not very encouraging.
It is 2017 and Donald Trump is the president and the interest rates have inched higher. Does it still makes sense to take a $1 million loan in California?
Great question. Per the title, only if you can afford to carry a $1M loan and never default. Rates for a 30-year fixed are now around 4% – 4.5%, depending on credit, AFTER a 0.5-0.75% move after Trump won. If your total monthly liabilities is less than 33% of your total gross income, and you foresee good income visibility over the next five years, $1M is still the ideal mortgage amount.
That said, coastal city real estate prices are finally starting to weaken after 8 years of explosive growth. As a result, I’m NOT buying physical property now, and waiting for a 1-2 year fade into 2018-2019. Instead, I’m investing more surgically in the heartland of America through real estate crowdsourcing platform RealtyShares (free to sign up and explore). You can invest in higher yielding properties at much lower valuations for $5,000 – $10,000 minimums versus coming up with a $200,000+ downpayment and taking on $1,000,000 in mortgage debt for the median SF or NYC home price.
Fundrise, also another real estate crowdsourcing platform has a Heartland eREIT as well.
Related post: Why I’m Investing In The Heartland Of America
Thanks for your comment and that kind of confirms my understanding too. However I am not just looking at it from an investment point of view. There are other things to consider as you are very well aware of in bay area like good school district etc. Also if you look at the other expensive locales around the world in terms of real estate like London , Sanghai, Singapore , HongKong, Mumbai, New York – don’t you think that the bay area is similar to those places (due to economic vibrancy and incoming migrant workforces) where the real estate prices can only go up and the median prices will be higher in 2018-19 than now? Yes, I know about 2007-2008 but that I consider an exception which banks probably will never repeat ever :)
Ok, getting ready to pull the trigger on a 1M home with 250K down. Income around 200K. Serious psychological barrier to get over. Property tax will be about $12,500/annually. That is until the house goes up in value. Yikes!
I get it. I guess I’m just having a hard time wrapping my head around a 675K+ mortgage being a good idea, or the one million dollar mortgage (if you can afford it) being an optimal…independent of the lifestyle boost (and with a 210K salary).
Purchased 1st home in 1996 for 140K@8.75%/30 year fixed..sold for 380K in 2006
Purchased 2nd home in 2006 for 497K on a 30year fixed…currently have 9.5 years left on 10 year fixed at 2.75. Owe 254K and worth 530K
Considering 900K+ home (675K mortgage) is 2016.
I’m a believer about constantly moving forward, but 2K currently going to principal every month is nice and comfortable. That said, we have outgrown our home and it’s starting to be dated/need money. Just trying to figure out if this is a logical progression? Track record indicates we stay 10 years, but this house would be a keeper unless we head someplace even more expensive like San Diego or Orange County. Just thinking about property tax, insurance and utilities on a 4,200 sq ft home and if a 10/1 ARM makes the most sense based on our history?
It has been said that the easiest way to make a million dollars is to borrow a million dollars, buy a million dollars worth of property, and pay it off.
Now obviously if that property is income producing which pays for your debt service for you, all the better… but buying a million dollar home and paying off a million dollar mortgage serves the same purpose.
I agree. You write the point very succinctly.
I had to write a whole post called, Buy Real Estate As Young As You Comfortably Can, to make this point!
If you pay off your $1M property, you will be a millionaire!
But then again, $3 Million Is The New $1 Million thanks to inflation.
Ok, trying to figure this all out. Wife and I are in early 40s. We currently have 9.5 years left on a 2.75/10 yr FRM down from 3.375 on a 15 year FRM. Currently $1950 of the $2580 (P&I) payment is going to principal. The refi was at no cost because we are with Fremont Bank. Love them! Owe 254K and house appraised for 518K. Wife and I have W2 income of 205-210K. 280K in 401K/503b and we will both have pensions through CalStrs in about 18 years. We work 185 days a year. 2K in principal, 2K towards pensions and 1800 goes to 403b per month. So I guess we are technically saving about 5,800/month. That said, lifestyle is just as important at this stage as building wealth. We also pay the IRS about 7K at tax time with both of us claiming 0. No debt but no cash reserve either. That said, was not prepared to find a dream home scenario in Cali on a hilltop (full acre) over looking a body of water. New construction and will run about 950K. The builder doesn’t sell on contingency. Need a 5% deposit to move forward which we would need to be creative to come up with without selling existing home. Would love to keep existing in home a perfect world, but a full 950K loan seems rediculous with our income. At the very least, we would like to make the dream home work after selling our existing home. What’s the play here?
PS Besides the house on the hill, we would also like to either ultimately live in San Diego or figure out how to have a vacation home there.
Maybe I’m just way too conservative so help me understand the math. I’m 39. I have about 400k in 401k. Looking to buy a new house and I have about 200k to put down on a house. I make 375k in salary at 100% of plan which is what I’ve hit 3 years running. I also get 180k – 300k PER year in RSU’s that best over a 4 year period. I don’t really have much debt at all. For some some reason my head hurts when I think about buying a house house for more than 650k which with property taxes in my area, with 20% down (130k) would be around 4500k p/ month. Reading this your basically saying I should stop being a wuss and go for a 1M mortgage?
Correct. If you are making $500-$700,000 a year in total compensation, then you can definitely afford a 1 million Dollar mortgage with today’s interest rates. Of course, don’t count your RSUs as part of your compensation.
But don’t buy a more expensive house if you’re happy with the way you’re living now. I’m just saying for Max lifestyle and tax deduction purposes, a 1 million Mortgage is ideal for high income earners eho get taxed to hell.
You may enjoy this post:https://www.financialsamurai.com/buy-real-estate-as-young-as-you-possibly-can/
Thanks for the reply. Yeah, my average is 360k (not including RSU’s but they are starting to vest so income could be generated yearly). So even at 360k to be on the safe side, technically I could do it. Current home I would sell is worth about 370k and I owe 320k. The houses my wife and I are interested in the 800-850 range so with 200k down that’s only a 600-650 mortgage. I’m sort of comfortable there so maybe I’ll pull the trigger :)
What advice would you give someone with a financial windfall of multiple millions in order to minimize the tax fallout? I have heard charitable trust, charitable foundations but I am also interested in real estate, living well in retirement and philanthropy.
Hi- my husband and I are considering a $1m mortgage. We own a home, which we will not be able to sell for what we bought. We may just try and rent it if we decide to move, since we’d be losing money by selling it.
My question is about taxes- we get hit with AMT every year! We live in NY, make @ $450K a year and pay $14K a year in RE taxes. All our RE taxes and NYS income tax get taken away on AMT- ugh! We paid an extra $7K in AMT in 2014. Our mortgage interest was also phased out on our itemized dedcutions. We paid $105K in federal taxes and $27K in State in 2014- WTF!
The home we are looking at has $30K in taxes :o
My concern is I’ll never get the tax deduction for RE taxes and my mortgage interest will continue to be phased out the more we make. This makes it hard to believe we can afford this home. Please let me know your thoughts. I’ll also check out your taxes article.
How on earth is someone making $80k a year supposed to afford mortgage interest AND PROPERTY TAXES on a $2M home?
Even at a modest property tax rate of 1.25%, on a $2 M home that is $25,000/year in property taxes. Add that to $26,000 in interest on a 2.6% mortgage of $1 M, this adds to $51,000/year.
This means our $80,000/year earner has just $29,000/year for everything else, including payroll taxes of about $6,000/year and fed and state income taxes of at least $3000/year or so. This leaves $20,000/year for food, home maintenance, insurance, transportation, utilities, and everything else.
You think someone earning $80k annually should basically buy so much house they live paycheck to paycheck on basically 1/4 of their income. You are nuts!!!!!!!!!!!!!!!!
Thank you for the only sane comment on here! Maybe I am just not the right audience for this guy’s “tips”, since it seems like I need to make 300k+ to even consider his advice!
$250,000 is probably good enough with rates this low.
But if you are confused, just re-read the last part of the title.
Get motivated to earn more, or not. The analysis is based on my experience with multiple income and mortgage permutations.
Loved your article on the $1M mortgage! I am building spec homes on Sanibel Island, which will be worth approximately $1-1.5M when complete. I have a cash backer, whose only worry is not selling it before completed. (Which is NOT going to happen!) But, let’s say it does….
we have super upscale vacation rental programs here, and this home would rent for $5-6,000.00 per week in season and $4-5,000.00 out of season. (A lot of the homes don’t even reduce rents for the summer months, but I’m trying to be conservative). We have about an 85% occupancy rate. So, let’s say he finances $1M, what would a likely monthly payment be with taxes and interest? I am putting together a business plan for him, and he is a “numbers cruncher”, so I want to have as many facts and projections as possible in my presentation to him.
Let’s say the interest rate is 3%, then that’s $30,000 of interest a year or $2,500 a month if interest only. But usually it’s PMI, so you’re probably talking close to $4,000 a month total payment.
Good luck and subscribe to my site to keep in touch and check out more real estate articles here.
There a lot more lending programs for buyers withthe right income and assets for properties over $1 million dollars. Why? Lenders use stats and the stats show that this segment of buyers defaults the least so they are aggressively going after them. 90% financing up to $1.5M and no mortgage insurance are just some of the programs being offered. I know since I work in the industry.
Great website, lots of valuable info but my situation is a little different.
Just married no children annual salary 600k Looking to buy 1st home. Looking at homes that cost 1.4M Property taxes about 35-40k a year! … Can I really afford this? I Have 10% to put down through special loan and still have another 75k. Cash in the bank.
No debt other than student loans 1500 a month everything else paid off.
I’m getting taken by Uncle Sam because I currently don’t have anything to deduct. Will a big mortgage and property taxes even make a difference at 600k?
Any advice would help
Is this to much debt to handle for A 1st home?
600k is a great income. What about buying when you have at least 20% down plus a 10% buffer? I think you’ll feel better and you should be able to save that much soon.
What do you do?
$1.1 million mortgage isn’t a lot with rates below 4% for a mortgage and a 600k income.
Thanks,
Yes it should not take long to save but hate leasing for another 12 months. Would rather do something sooner than later to cut payed taxes if that’s worth anything and I hate throwing money away renting. I have no children and no property so no deductions. It’s painful. I practice medicine… I know very little about finances as most physicians. I also trust noone other than myself with my money and financial planing so that also makes it difficult for us.
Read a few good books (millionaire next door, die broke ect.)that reccomend buying your 2 home 1st!
What best way for someone like myself to pay less in taxes?
Thanks
https://www.financialsamurai.com/how-to-pay-little-to-no-taxes-for-the-rest-of-your-life/
Hi Sam,
I really have enjoyed reading through your website for the past few hours. I wanted to see if you have any thoughts on the following:
I am a 29 year old male that is married and my wife is planning to stay at home so we will just go off of my salary. I make 125K salary a year and earn about 100-125K in commission in my business development role. The past two years, I’ve made about 250K each year.
I have about 150K saved (15K in checking and about 135K in brokerage). Also, I have only 15K in debt (from a car purchase and it’s 2% APR). I paid off about 100K in tuition for my undergrad and graduate education and my wife’s graduate education.
Based on my salary of 125K and the fact that I could make as little as 150K a year (likely 200-275K), do you think it’s silly to look at 700K houses?
Also, I am moving from Chicago to a much less expensive area with low home taxes and zero sales tax. I like to factor that into my decision.
Please let me know if you think 700K right now with a 4.25% 30 year fixed loan is a good decision and/or if you think it would be smarter and safer to hold back and/or to look at 400-600K range.
Thanks in advance!
$700k is in the ballpark for your income. I say go for it.
Read this too: https://www.financialsamurai.com/the-best-time-to-buy-property-is-when-you-can-afford-it/
Hi Sam,
I’ve enjoyed spending the last several hours on your site reading through some of your articles. Very interesting stuff!
I wanted to get your opinion on my situation.
I am 29 years old and married and my wife plans to stay at home once we have kids (which we plan in the next year or two) so I want to base it 100% off of my salary. I have been with the same firm for 7 years and am now in a position where I make $125K salary and about $125K in bonus each year. It is a business development role so technically I could make as little as $150K in a year.
After paying off my undergraduate, my wife’s graduate, and my MBA over the past few years, I have zero debt outside of about 15K left on my car.
My savings are about 150K and I keep roughly 15K in my checking and the other 135K in a pretty stable mix of ETFs in my brokerage account.
I also have about 150K in my 401K. Other than that, I have no real assets and have rented for a while.
I am in a situation where I plan to move from Chicago to an area out East that has much lower taxes (i.e. ~$6K/year for a 700K house instead of about $12K/year for a 700K house in Chicago). Additionally, living expenses for the area are much lower.
Based on my situation above, do you think that I would be smart to put in an offer on a 700K house that we like. We have been looking all around at places and got preapproved for 1M+ but feel like a 400-600K house is more appropriate given our current positioning.
Also, we have been preapproved for 4.25% 30 year fixed piggy-back loan for really any price range that we would realistically look at.
Thanks in advance and I enjoy your site!
Kevin
Sam,
I’ve just now stumbled across your site – great stuff so far. A topic I’d love for you to address is what will happen when the interest rates inevitably go back up to 5-10%. Obviously, if you financed at 2% and love your house, life is great. What about those looking to sell when the converse of what you describe above happens? i.e., when mortgage payments double and no one can qualify for a loan on $1 million+. I’ve spun this scenario out with several people with different views. Love to hear your thoughts.
Thanks,
Scott
Hi Scott,
Is 5-10% interest rates really inevitable? We’ve seen a 35 year decline in the 10year yield. What makes you think we’re suddenly going to shoot up 2-4x?
If rates go up that much, I’ll take it because assets are inflating like crazy.
Sam
Property taxes ruin this strategy for some states like in Texas. However, you can buy that awesome $500k house here.
What are prop tax rates now in TX? At least there is no income tax.
You are right, there is no income tax in Texas. Property tax depends on which school district you live in and it changes a little every year, but 2% is a fair estimate. $20k a year extra in taxes is huge. However, property taxes helped contribute to Texas real estate fairing well during the bubble because residents prefer cheaper appraised homes.
how much should a $1mm mortgage cost? that is, if the gross amount is $1mm, what should you clear? would you have any suggestions on whose fees are the cheapest?
Jeff, it depends on your income, but I’d check Quicken Loans for a free, no obligation quote. Given they don’t have the overhead as the bricks and mortars banks, I’ve found the to offer some of the lowest rates.
I’ve seen 5/1 ARM Jumbo $1 million mortgages go for as low as 2.375% now. 30-year is closer to 3%.
Sam,
No worries; rookie mistake. I know now for future posts.
As far as Prosper………I did some what risky, bullish investments with no real historic data to back it up. Basically, in 2010 I invested huge amounts per loans (up to $15K on some loans) and locked in old prosper rates of 30-35%. I cherry picked loans, conversed with the lenders who were mostly military and if I thought it was a good risk, I’d go for it. Then I started including repeat borrowers and did the same. Luckily for me, MOST of the large loans are current. Now, I automate the investments at $100 a loan or so with some pre set filters that in prosper’s short history have produces a 10-15% ROI. I am trying to be smart about it now and not just got with my gut (which ironically paid off this time) but all it takes is a few of the large ones to go bad and my ROI plummets.
When I filed for taxes this year that $45K which was not net because I took $10K in losses but you know how the IRS does it…I had to report $45K as total income and could only write off $3K. This is how I found your blog…I have been looking for ways to pay less taxes.
Thoughts so far:
1- Open a business and invest into Prosper. This way I can write off all my losses and expenses it takes me to invest.
2- Buy a house. At first I was going to go modest like most Americans with the best intentions but now I have been schooled by your articles and the comment threads and will get the best property location wise I can afford.
3- ROTH IRA…WAS a thought until I got schooled (again) by some of your older articles. The comment thread was excellent and pretty funny at times; the numbers made sense though.
My question would be should my wife and I max out 401K and the TSP (in my case for military)? I never opened one because I have always been drawn to real estate and having my money accessible as opposed to getting them at 55+. Is that the wrong mindset? I rather have real estate and other investments such as P2P. Although P2P now has IRA options, but again….same argument about age.
My income is safe and will only go up with promotions (one coming in a few months). Yes, I will get a 50% of my taxable income or more depending on how many more years after 20 serve. In the field I am in, I can easily make substantially more after I retire (age 37) than I am now but who wants to keep working, right?!
Ok, so your comments make me reflect and think I am worried too much about max’ing my deductions as opposed to getting the best property. Ok, so I am good affording my first property. When calculating for a second property, do you take into account your first mortgage as a monthly expense? I am confused whether I should get the best property under VA loan limits ($0 down) and shortly after purchase a second in Oahu with 20% down from my savings. Not planning to sell but just buy, hold and rent.
When do you start moving on to more properties? When you build equity or are just when you have enough saved to cover mortgages 6-12 months?
Where or what area do you have your property in Oahu at if you don’t mind me asking? In your experience which has been a sounder investment: SFH, condo or multi-family? Do you have a Realtor you recommend? I’ll be in paradise starting end of March this year.
Sorry for the unload of questions. I have learned a lot just in the past two days on your site. Look forward to learning more. I am going to open a Personal Capital account to start tracking my current and future financial moves.
Thanks for any input you wish to provide.
-Jay
Hi Jay,
Sounds like you are doing great. Your questions go beyond the scope of the comments section. If you’d like to work 1X1, feel free to check out this page on my services. But before you decide, definitely spend a good amount of time on the site.
Thanks,
Sam
Sam,
Yea they are some loaded questions! Thank you for your input and opinions so far. I will continue to familiarize myself with your site and look further into your services.
Would you mind sharing what area of Oahu you purchased in? How long have you owned? Any periods of vacancy?
Thanks again for the input and the knowledge you share on your blog.
-Jay
Sam,
I loved this article. I know I am late reading it but I had a question. If my wife and I fall in the $150-180 salary range, would you still recommend getting the most expensive home we can afford with the bank’s money. Depending on interest income, our AGI will vary but it will definitely be over $166,800.
Should purchase a home within the highest amount possible?
Disclaimer: Not taking your advice as gospel just want your opinion. I will seek professional advice for any decision I make. Thanks!
Hi Jay,
Welcome to my site. Without knowing your savings amounts, budget, rough age, and longevity to work, it’s tough to say.
I’m hoping you have a good foundation already and if you can regularly make $200,000+ a year, then a $1 mil mortgage that costs $27,000-$35,000 a year in interest is not that bad at all.
I think the housing market is in a Multi year recovery too.
Sam
Hey Sam,
Thanks for the quick reply. Yea, I did leave that out, huh?!
Savings in cash: $130K+
Interest income (Prosper): Approx $3.75K/month(will go down if i do not re-invest)
Debts: $0 besides necessities (rent)
Age: 28
After reading your articles, I am kicking my own ass for not buying where I have been living the past 3 years. I am active duty so I am transferring to Hawaii for at least 4 years (trying to extend to a 8 year tour) and now that I have a fresh start and a VA loan at my grasps was wondering if my wife and I should jump into a bigger house than planned.
Combined Gross for 2011 was $185K. Both of us have zero debts, so after getting raped on our 2011 taxes, I started doing some research and landing on your blog. Want to deduct as much as possible while investing. Prosper taxes were pretty hefty too.
Thanks for any advice and sweet blog. Already recommended to fellow military who need it like me. Many of us make decent tax free money and do not put it to good use.
J
I think my response didn’t go through…
Thanks for the quick reply. Sorry about the vague post, I’ll fill you in on some of the details.
Combined (Wife and I):
Savings: $140K+ or so
Gross Income from salary: 145K+
Interest income (Prosper): 45K for 2011, but that may decrease if I do no re-invest the money in my savings back into Prosper
Debts: Zero besides rent.
Age: 28/27 (wife)
Longevity: 10-14 more years active duty and then retire and work as a government contractor for however long I need to. Wife is a contractor and can work for 30+ yrs if needed.
After reading a couple of your articles, I am kicking myself in the ass for not buying property where I have been stationed for the last three years.
So now I get a fresh start. We moving to Oahu, HI next month for 4 yrs (possibly 8 if I can extend the tour) and can easily get my hands on a VA Loan or a different loan if needed. I know hawaii has some different real estate laws than the mainland but like I was reading about your SF properties. I wanna go all in and get a nice property in a high demand, high end area where long term rental is easy. Just do not know what the right mortgage range is.
I have to take into account that eventually I have to move and we will have to purchase another property where we move next but I have to worry about covering both mortgages in case the rental property becomes vacant. Hence, trying to purchase in either a high end are or military community where it would rent easy. The military community would be on the cheaper end though, so the higher end properties look more attractive.
So, would you recommend still shooting for the $1M mortgage or going lower to leave cushion for a second mortgage when I move again?
Nice blog. Found yesterday and already recommended to a few peers.
-Jay
Hi Jay,
Sorry you had to re-type or repaste your comment. My blog has a super sensitive spam system for all comments which need approval.
I’m very impressed with your massive Prosper interest income! To get $45,000 in 2011 at a 10% return, does that mean you’ve got about $450,000 invested with them? I’d love to hear more about your strategy as amassing that much in Prosper at 28 is huge.
Given you are in the military, your income is relatively safe and you will get a pension correct? If so, based on your income and savings, buying a house now seems to make a lot of sense. I’ve got a property in Oahu btw.
I think you’ve got to focus on buying the best property, not so much getting a $1M mortgage. Find the best property with the right cash flow and then go from there. If the perfect property so happens to be worth $1-$1.2 million and you can afford it, then definitely consider.
Also, given your assets, I suggest you sign up for Personal Capital and track your finances for free. It tracks your net worth, analyzes your portfolio, and keeps your spending in check.
Cheers, Sam
We keep going back and forth on this… so far we’re staying in the low COL area because I like my job and there aren’t many jobs like it in the SF bay area. DH, otoh, is worth quite a bit more in Silicon Valley. If I were willing to take an industry job we’d be doing quite well money-wise, even with housing costs. We’ve got friends out there with a tiny 800K home, and we envy them! (Despite our gorgeous 3000 sq ft 265K McMansion.) But so far my job is winning over income and greater wealth accumulation.
It’s one of those chicken or the egg thingies.
The reason why real estate is so expensive in Silicon Valley is b/c that’s where the high paying jobs are. Things are really booming in the Valley with all these startups and IPOs.
IF you’re happy, then that’s all that matters. However, I would consider taking a chance and making those big bucks while you still have energy. You can then retire practically anywhere in the world and your dollar will go way farther!
We’d rather retire in the SF bay area. Living someplace like we’re living now without a great job to go to every day sounds like torture.
Heck, we could retire to DH’s home town (pop 3K and shrinking) right now but I would shoot myself probably at week 3 (since I know from vacation experience 2 weeks is all I can stand). More than anything else I need to keep busy. That’s easy someplace like SF or Mountain View with great libraries and great weather and awesome culture and nature and so on. Most other places it requires a job.
I think maxing out your real estate purchase based on today’s rates would be foolish. There are so many things that can go wrong from rates increasing to further home price declines to job loss and needing to move that it could be completely disasterous. Let’s say you have to take a 10% loss on a 300K home; $30K down the drain. On a $1 Mil home, that’s $100,000. Who can stomach that? (aside from the very wealthy).
Is real estate still pretty bad where you are Darwin? I remember you mentioned you writing you couldn’t refinance due to the equity below 20% or something.
It seems very clear to me real estate is improving at least in the Bay Area. Lots of people can stomach a 100k drop if they can afford a $1 mil mortgage. Real estate is for the long term.
I guess I am weird. I prefer really small houses that only cost $40,000 to $100,000 to build from scratch and can be easily powered by solar. (I am not one of those green junkies but do see some advantages to green energy). Since I am single at the moment, that works for me!
I don’t think that’s weird at all actually. Simplicity is good, and if it makes you happy, go for it!
I’m focused on building wealth in this article. thx
Since we got neck-deep with debts and loans and experienced sleepless nights thinking how we are going to pay them off, I wouldn’t want to get into another debt anymore. Much more $1M loan! We are looking for a bigger property where we can move next year, but a $1-M mortgage is definitely too high for the budget.
Thanks for the article Sam – I have a question about rentals. When do you consider it a good time to contemplate buying a rental and renting it out? Obviously the extra mortgage interest is a bonus, but do you have a rule for what kind of financial situation a person should be in before pursuing rentals? I bought my first house earlier this year and leaned more on the conservative side, so am looking forward to having rentals in maybe 10 years. Just want to have my ducks in a row!
You took property taxes completely out of the equation. I live in the NYC area and pay 13K/year. Where do property taxes fit in your math?
It’s there, just implicit. I highlighted the minimum income that could feasibly take on a $1 million mortgage. As you know, your property tax is deductible as is your mortgage interest.
You say property tax is educative as if that means “don’t sweat it, it’s a wash.” It’s not a refund or a tax credit, it’s only a 25-30% discount. You’re still paying 70% of that tax. Spending more and taking in more risk, just so that the “money Uncle Sam is giving you back” is not the best rule to live by. That’s like my wife “saving me money” when she buys more stuff on sale! The best amount of mortgage is different for every couple based on their income, age, location, risk sensitivity, and lifestyle. I would be an absolute idiot to have a $1M mortgage if there are great homes in good neighborhoods for $300K. Is it smarter than having a $2M home? Sure, but that doesn’t mean it’s optimum.
Don’t forget to make $250,000.
I was nervous about buying my first place, so I endend up buying at the bottom end of the range vs. the top.
But, if I was reading my blog today and know what I know now, I would have no fear.
Asymmetric risk reward is incredible in the US. The gov’t is on the side of the homeowner w/ all these subsidies and bailouts!
A million dollar would be almost enough to buy a small apartment around here. I wish I’d done that when I was younger.
I hope you many many small apartments, or a large apartment? Portland is so cheap compared to SF! I too, wish I bought multiple apartments in good areas 10 years ago. I’ll just have to settle for what I have and make do. Next life!
Are there any more apartments in good areas you would recommend buying now? We live in the sf bay area and pretty much already max out with the $1m mortgage with our home and a rental condo (which use to I live before getting married). We still some cash on hand and would love to get into real estate. Any recommendation you have would be great. We are married and together earning between $350k-$390k.
Sounds like you want to get MORE into real estate, not so much get into real estate yeah? I’m biased to focus on prime properties in good areas rather than fringe properties. Better to manage good tenants than bad tenants. Burlingame, Hillsborough, Fremont, Sunnyvale, good parts of SF are seeing nice rental increases.
It also depends on how much cash you have and your belief in the continuation of a 350-390K income.
If it’s not needed, it’s not needed. Mortgage amounts are different for everyone.
It depends on how much you make and how much cash you have.
I live in the cheap midwest where a 1 mil would literally buy a castle. This is not an ideal mortgage in my area because it would buy an absurdly huge house that wouldn’t make any sense for most people.
In my area, you can buy a large fancy home on several acres for $300K. The ideal mortgage for me equates to the size of house that any one person needs, not some arbitrary number.
The $1 million mortgage is predicated on the assumption that the ideal income per person is $200,000 for max happiness.
The article is a way to think about how to take advantage of the government and maximizing wealth in our existing framework.
Just make sure you’re AGI comes in at $166,800, otherwise the whole formula is shot. Need a bunch of above-the-line deductions to get there.
It’s not shot. It’s a gradually fade in deduction benefits. Plug in $500,000 into the formula and you’ll see.
Another great article but is it really correct to say that:
“…it’s also absurd that one can borrow $1 million dollars nowadays for only 2.625%”?
In a world of ZIRP, government policies and QEternity which actively encourage lending and borrowing, low CPI numbers and so on, why are such low rates “absurd”? It’s certainly cheap by historical standards (anchoring), but in today’s financial world it wouldn’t appear to be completely out of touch with reality (bearing in mind that the banks are not taking a long term punt on interest rates – they are either making a spread or offloading much of the risk).
Separately, borrowers don’t just pay interest. They also have to pay principal on their loans. Their income needs to be high enough to pay both – if you can, I agree that more debt is a good thing. Relying on selling the property or refinancing in five years isn’t a great answer – that’s how a lot of flippers got burned last time around.
I say absurd in a good way. It’s absurdly awesome!
All about buying/owning real assets in this environment.
Sam,
Are you concerned with the mortgage interest cap coming down as part of future tax legislation? It’s been referenced in the debates. It would be a bummer if one took out a $1M mortgage and then the rules on deductions changed.
-Mike
Not concerned. It will never happen b/c too many people are homeowners, and the NAR is a huge lobby group.
I think now is the time to finance as much as you can to invest in income property. Unfortunately, there probably not enough good properties for the demand. Therefore the prices will be high. It also helps if you know what your doing.
I know when I tried to refinance my home mortgage, size did matter! If your balance is too small, it probably is not worth refinancing.
I live in St. Louis, where you can get an awesome home for around $300K! Gotta love the StL :)
Nice! How are the incomes and job opportunities there? Do you know of any friends making $250,000+?
Part of the reason why I don’t mind living in an expensive area is b/c besides the attraction of the coastal cities, the incomes are much higher it seems. Hence, anywhere I move after is cheaper.
I think income and job opportunities are great here. I don’t have any close friends making over $250,000, but that is only because we are all still in our early 20s and nearly all of my friends are still in grad school.
Got it. Why do you think home prices are so cheap there?
That isn’t cheap at all. Here in Mobile, Al you can get a BEAUTIFUL house for 150,000.. I can’t even IMAGINE spending more than that on a home.
But have you been to beautiful SF, San Diego, etc?
No offense but you’re not imagining very hard, then. It’s ok to have lower standards, I mean I wish I could be happy with a tiny home, but it’s not reality. To build a quality house is going to cost any builder in the range of $150-200 even if it’s in a remote location or small town, so at $150K you’re looking at a house that’s 1,000 square feet. Let’s say they build it out of the lowest quality 2×4 materials, no granite countertops, nothing fancy, just your basic slap-it-together build, ok maybe you get a 2,000 square foot house. You’re not going to get a 4,500 square foot luxury house for under $1M, anywhere, it’s just not going to happen. If you’re fine with lower quality building materials and being in the middle of nowhere, sure, you could do that, but I can guarantee you I wouldn’t be happy in a $150K house even if I did want to live in rural Alabama lol.
It’s crazy how much a difference lower interest rates can make. That’s a big drop from 150k to 79.5k in the minimum annual income on a 1mil mortgage! I admit I didn’t realize how expensive real estate prices are until I moved to SF from suburbia. I’d say it’s pretty common for small families living in the city here to have million dollar mortgages, but most of them are probably making more like $150-200k at a minimum.
I don’t think I’d take out a $1mil mortgage here if I was a solo income earner making the minimum of 79.5k. The city is an expensive place to live in, especially with all the taxes CA has, and a salary of 79.5 would be cutting it pretty tight for that amount of mortgage.
It really is crazy, and I am SO thankful. I’m saving so much interest expense on my rentals and primary while rents have gone up over 50% in the past 10 years. It’s amazing regarding the inflation in rent and the deflation in mortgage interest.
These low rates have also helped thousands of homeowners stay in their homes during tough economic times. Hate the Fed all people want, but they are saving people money.
Will banks actually approve a ratio such as this? I’ve been in the market in San Francisco for some time right now and my income hits the sweet spot of what you’re outlining (~250k on two incomes, perfect credit, and $0 debt–ZERO–of any shape or form) and I’m finding they’re only willing to go to the max of conforming loan limits, which is $625k for most properties or $729k for an FHA loan (which, for separate reasons, is a tough sell in SF right now). That means my affordability is effectively that amount plus my downpayment, and not a dollar more. Am I hearing the wrong things from my brokers?
Have you checked online with Quicken Loans or other online mortgage companies? I’ve found online mortgage companies to be a little more flexible on options given the lack of overhead.
Bricks and mortar banks are much slower and more stringent. 3X your income is a $750,000 loan, which is the traditional ratio banks use. But since rates have dropped by 50% over the past 10 years, affordability is much better, but some banks have been slow to change.
The low interest rates have not only helped save people money on mortgage payments, they have also saved home prices from crashing. If the rates were not lowered, the real estate market would have crashed and many people would have defaulted, causing banks to make a loss and impact the economy.
If you are young, wise with your finances, and aggressively investing, it makes sense to borrow $1M. I wouldn’t dream of repaying my 2.29% mortgage because I am making much more elsewhere with the money.
But I am sending my mom to the bank this week to repay her 3.5% mortgage with the money from her 1.6% savings account!
I would have happily taken more mortgage, I consider it “good debt” but in the UK the maximum was 4 times your annual gross, so with $80K you can borrow $320K, not $1M.
1.6% in a savings account is great! You only get 0.2% here in the US.
It’s the same thing here in the US… a bank will only loan out 3-5X your annual gross income, hence $200,000-$334,000 in income is needed to borrow $1 million. But, the banks are using old ratios based on rates 100% higher. This is a key point in my article.
Everybody just got closer to the “ideal income” with a 50% chop in rates!
I see! I got that wrong with your second paragraph saying the calculation was interest expense times three to determine the rate. Strange that the banks would keep their ratios based on high interests. It all comes down to the same though, you can borrow more cheap money!
If you shop around, there are several credit unions that offer upwards of 3% interest on checking accounts. Lake Michigan Credit Union, for one.
3%? I’m sure there is some artificially low deposit amount gap to try and entice people to move money over. It is a very good strategy.
It’s a maximum of $15,000 @ 3%, which has been a ~$440 return for me and my wife (each) the past two years. Call it what you want, no banks are offering anything near that. Combined with other competitive offers (e.g., low interest auto and mortgage loans), and you have a great place to bank.
That is definitely good free low risk money!