We just purchased a $1.6M home. That isn’t a huge home here in the Bay Area, but it’s also not the cheapest home we could buy–especially of the 3 bedroom / 2 bath variety. But it was large in terms of square footage and with an oversized lot in a neighborhood we wanted to buy in (or, well, a block away) I ran all the variables in my head and decided while this isn’t the one now it definitely can be with some work. It’s also in an up-and-coming area and I think the value will hold in 5-10 years time, if we do decide to sell.
Rules for Buying a Million Dollar Home
I have a few home buying rules that are a little nutty but they work for my oddly conservative financial brain.
- 20% down + 3% closing costs
- 6 Months of home and rent expenses (we will have 1-2 months overlap on rent and house to make the move smooth)
- 6 months of basic living expenses outside of housing
- Any taxes due within the next 6 months
- $50k-$100k “first year fixes” fund (try not to spend all of this, but have available if needed esp when buying an older house)
- 6 months additional in emergency fund (all monthly costs)
My one additional rule that I am going to stick to (but will be harder) is:
- No more than 20% of networth in equity at any one time.
Home Equity =
+ Principal Paid
+ Any Realistic Gain on Home Value (if sold today)
– Any Realistic Loss on Home Value (if sold today)
– 10% current value of home (cost to sell)
– .30% of any gain over $500k+home maintenance fees
This means that right now, my home equity is worth:
This means that my remaining AFTER TAX cash & investments should be $805k to have 20% of my networth in my home.
Buying a Million Dollar Home Doesn’t Have to be That Scary
This is what makes buying a $1.6M home less scary, but it also means that before buying a $1.6M home you not only should save a large downpayment, but also an additional $1.1M. Not everyone can do this, or wants to do this before buying a house. It’s possible I should have purchased a house 10 years ago for $800k, where now my mortgage would be $3500 a month, vs $7000 a month (give or take) and I’d have 20 years left to pay it off. But then I wouldn’t have the $1.1M, and I would have definitely gone into home ownership with way too much of my networth in home equity.
I prefer to build up that larger cushion and know that a chunk of my money still has access to the markets, which will likely outperform my house after you factor in lost opportunity cost with the downpayment, etc.
How much of your networth is in home equity?