Tag Archives: down payment

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
=======
$161k

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?

My Dream House

When I was a little girl, I dreamed of one day living in a house with a big backyard, a view of the ocean (or at least twinkling lights), a heated pool, hot tub, a grande foyer, marble, a mix of contemporary architecture and classic detailing, each room decorated and designed to perfection. These days, I’m a bit more reasonable when it comes to contemplating a home purchase, but my irrationality is kick-starting my savings for a down payment.

Actually buying a house may be years off, but one day I hope to do it. I have friends (who live in more affordable areas, and who generally are engaged or married) already taking the mortgage plunge. I’ll admit my jealousy, a bit, but I feel much better about it when I pay my $632 rent and have the rest of my money to save.

I can deal with living in cramped quarters for cheap rent, but I’m not sure I’ll be willing to make such a compromise when it comes time to seriously think about buying a house. I grew up in a mid-size home. It had a downstairs, an upstairs, 3 nice sized bedrooms (large by modern constructions standards), a master bedroom, a den, a kitchen, a living room and 3 bathrooms, not to mention an incredible, grassy backyard. Growing up in such middle-class luxury, it’s tough to think about raising a family in any place smaller than that.

But, as it goes, my dream house will likely be well out of reach.

A quick peak at any local real estate guide showcases my dream house for, at minimum, $1.5 mil. That is, in the Bay Area (San Mateo County), even a tiny house goes for $800k. You’re lucky to get a decent studio for $500k.

Back home in New Jersey, my parents nice house that I spent my entire childhood in isn’t even worth that! So it seems if I ever hope to own the house of my dreams, or anything close to it, the Bay Area is out of that picture.

Living in the Bay Area for the past three years has made me realize just how important it is to live a place that makes you happy, beyond just an apartment or house. Here, I have so much natural beauty around me I could live in a (waterproof) cardboard box and be happy (assuming I have gym access for a shower every so often).

But then there’s my hope to raise a family, two or three kids, and that takes a house big enough to fit those kids. That takes a lot of money. I don’t think it will come from my won’t-ask-for-a-raise boyfriend. So that means I need to start saving for a down payment, and also forcing myself to think realistically about what sort of house I will be able to afford.

For starters, I’m going to try to save $300 a month towards my down payent fund. The question is, where do I save this money? The stock market is probably a bad place for it, though it’s possible this is a good time to invest the cash if I hope to put a down payment on a house in 5 to 10 years. Or maybe that’s an awful idea. Maybe it should just go in an ING CD and stay there until I’m read to spend it.

The other issue is graduate school. If I decide to go, there goes my down payment, and then some. My lifetime earnings may increase, but not my purchasing power in 5 years.

I just can’t fathom saving $200k for the downpayment on a $1M home. Even half of that seems impossible. Not to mention that someone making $60k is not supposed to buy a home that costs that much. What’s the rule… no more than 4 times your income? Uh, I can’t get ANYTHING for $240k in this area.

I could probably borrow the money from my dad’s 401k once he has access to it, but as I’ve written before, I want to try my best to be financially independent from my parents, as I have been since graduating college. Being a spoiled kid is one thing, but you can’t really be an adult until… you go into debt buying something you really want, and need, and that will make you money in the long run.