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 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.
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) Refinance your mortgage.
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 300,000 investors and runs $3 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. Thanks to low rates, positive demographics, and a desire to own real assets, rents and property prices are increasing.
My other favorite real estate investing platform is CrowdStreet. CrowdStreet focuses on individual real estate opportunities in 18-hour cities. 18-hour cities have faster growth and lower valuations. As a result, upside could be greater. If you are an accredited investor who likes to build their own portfolio, Crowdstreet is great.
I've met executives from both platforms. They are the two leaders who are sourcing some of the best deals. 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 55,000+ 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.