Cash Needed for Buying a Million Dollar Home

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 =

+ Downpayment
+ 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:

+ $322k
+ $0
+ $0
– $0
– $161k
– $0k

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?

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11 thoughts on “Cash Needed for Buying a Million Dollar Home”

  1. That is a very interesting formula. Why do you not want to let your home equity be more than 20% of your net worth?

    I just did the calculation, and we are at 22%. But this will continue to go down. In the Bay Area, there is the possibility that the value of your home continues to increase at a rapid rate so it is difficult to maintain 20% or less. But realistically, I don’t know why that would be a problem, as long as your other more liquid assets are growing.

    1. I read the 20% rule in a few places, and felt good about it. Basically, this means that 80% of my networth is still attached to growth investments (I’m at about 90/10 split right now stocks/bonds) so I don’t lose out on that growth. Yes, it’s possible housing can go up in value (it’s been at about 6% YoY for the last 50 years in my area on average) but it could also slow down. A lot of people see Bay Area housing as an investment and maybe it is, but like any other investment it shouldn’t be a huge part of your portfolio.

      Home value can def increase at a rapid rate, and my goal is to keep investing aggressively as well to match that. If home equity is worth $500k, then I need a total networth of $2.5M. That seems reasonable. If home equity is $1M, need networth of $5M. And so on. Those all seem like good goals to have… in 10 years my home equity should be around $1M, give or take, and my goal is to have $5M networth in 10 years, so that’s about right. 🙂

  2. That’s so bizarre in terms of comparison with rural Arkansas. We have a 3,000 sq ft, four bedroom, four full bathroom house on two full acres of land and the most I could sell it for would be around $190,000. Not only that but I’m surrounded on three sides by 800 acres of wooded wetlands that I don’t own but am free to use. I can’t imagine paying $500,000 for a house much less over a million. That might be one of the key stumbling blocks of understanding between red and blue states, we just can’t wrap our heads around the cost of living in each others location? But it does seem like you’ve got it figured out there and you’ll probably make a million profit on it some day!

    1. Trust me, I don’t understand spending $1M+ on a house either. I grew up in an east coast blue state — but nice houses there are $600k or less, and in some areas much less. The big difference in a “blue state” is that I have a chance to earn $250k-$500k plus per year if I play my cards right. I also enjoy the diversity and culture here. I’m not a rural person — but if I was, I wouldn’t see any reason in staying and paying this much for a house. It is tough as a blue state person in a HCOL area to live in this country because all of the federal tax laws assume I’m wealthy. I mean, I’m definitely upper middle class, but we’re going to struggle to pay $7k a month mortgage on our income, esp if we need to add childcare, etc. If I ever lost my job we’d be in big trouble. It’s just two different worlds, right?

  3. An easy way to keep your “home-equity-as-a-%-of-net-worth” in check is to get an interest-only mortgage. Then you can precisely target exactly how much (or how little) you want to put into the home.

    Something to consider for the next refinance.

          1. Not necessarily.

            Interest only mortgages are usually ARMs but Wells Fargo also offers a 30-year fixed interest only product.

          2. Why wouldn’t everyone do this? Is it just because it’s adjustable rate? It seems locking in a 30 year fixed for 2.625% is a good deal.

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