What is the Cost of a $1 Million vs. a $2 Million Mortgage?

Nationwide home prices have been increasing dramatically for years. According to Zillow data, the average home price increased more than 39% from January 2020 to May 2022. Prices are even more extreme in certain parts of the country. For example, of May 2022, the average home price in Seattle is roughly $985,000, while houses in San Francisco sell for a shocking average price of $1.65 million.

If you live in one of these expensive cities — or simply want to purchase a high-priced home in your area — then you’re probably wondering how you can go about qualifying for a $1 million or $2 million mortgage as well as what those monthly payments look like. In this article, we’ll discuss mortgage payments and additional expenses you’re likely to incur while living in a one or two-million-dollar home.

The mortgage on a $1 million home vs. a $2 million home

The first thing to know about a mortgage loan on a $1 million or $2 million home is that your home’s value isn’t the same as your mortgage. When you buy a home, mortgage lenders generally require that you provide a down payment.

For a conventional loan, lenders require a down payment of at least 3% (though you’ll be required to pay private mortgage insurance (PMI) for anything less than 20%). However, for the mortgage on a $1 million or $2 million home, you can expect a lender to require closer to 20%. As a result, the mortgage on a $1 million home would be closer to $800,000. Meanwhile, a $1 million mortgage would actually be for a home priced at about $1.25 million.

Obviously, the numbers for a $2 million home are even greater. With a 20% down payment, the mortgage on a $2 million home would actually be about $1.6 million. And for a $2 million mortgage, you could purchase a $2.5 million home.

Loans on high-value homes

When most people buy homes, they’re able to borrow conforming loans, which are backed by Fannie Mae and Freddie Mac. But to qualify for a conforming loan, a loan must fall within the conforming loan limits set by the Federal Housing Finance Agency. In 2022, the conforming loan limits are $647,200 in most parts of the country and $970,800 in high cost of living areas.

It’s clear that a $1 million or $2 million mortgage loan doesn’t fall within these conforming loan limits. Instead, loans of that size are considered jumbo loans. Because these loans aren’t backed by any other entity, mortgage lenders can set their own borrowing requirements. Because of the increased risk to lenders, these loans usually require a higher credit score and larger down payment.

To get a better idea of what your loan terms may look like for a jumbo loan, check out the mortgage lenders below.

How to calculate your mortgage payment on a $1 million mortgage vs. a $2 million mortgage

If you’re considering buying a home with a $1 million or $2 million mortgage, you’re probably wondering how you can calculate your monthly mortgage payment.

There are four elements that go into your monthly mortgage payments:

• Principal. The original loan amount you borrow, which you’ll pay off over the entire loan term.
• Interest. The amount you’ll pay to borrow money from the lender. This is based on your interest rate and loan amount and amortized with your principal balance.
• Homeowners insurance. Usually paid as a part of your mortgage payment and placed into an annually paid escrow account.
• Property taxes. Like homeowners insurance, usually paid as a part of your mortgage payment and placed into an escrow account.

You can easily calculate the estimated payment on your mortgage using an online amortization or mortgage calculator. For a $1 million mortgage with a 5% interest rate, your monthly payment would be $5,368. For a $2 million mortgage with the same interest rate, you would have a monthly payment of $10,736.

Sample mortgage calculations

The table below shows the principal and interest payments for $1 million and $2 million mortgages, as well as those for $3 million and $5 million mortgages. The table assumes a 5% interest rate, but your payment could be higher or lower depending on the interest rate you’re eligible for.

Keep in mind that as you progress in your mortgage payoff, the percentage of your payments that go toward principal will increase, while the percentage that goes toward interest will decrease.

Of course, those numbers only include your principal and interest amounts. To get a more accurate idea of your monthly payments, look up the homeowner’s insurance and property tax rates in your area and add them to the loan payment. Additionally, if you have a variable interest rate, your mortgage payments will change as interest rates do.

Income needed for a $1 million mortgage vs. a $2 million mortgage

Your household income is one of the most important factors that determines the size of the mortgage loan you can borrow. As you can imagine, the majority of people don’t have sufficient income to qualify for a mortgage of one or two million dollars.

The figure that lenders use to calculate the size of the mortgage you can borrow is your debt-to-income ratio (DTI), which is the percentage of your gross income that goes toward debt. Lenders generally require a DTI of no more than 43%, though 36% is the preferred ratio.

So, what income would you need to qualify for a $1 million mortgage? It partially depends on how much debt you have. If your mortgage payment will be your only debt, then it’s also the only figure used in your DTI.

Let’s take the monthly payment of $5,368 that we discussed earlier. Assume that you have combined homeowners insurance and property taxes of $1,632, for a total monthly payment of $7,000. To qualify, you would need a monthly income of about $19,444, which comes out to roughly $233,328 per year.

Your monthly payments on a $2 million mortgage are likely to be about twice as much, meaning you would need a monthly income of about $38,889 per month, or $466,667 per year.

Qualifying for a jumbo loan

As we previously mentioned, jumbo loans often have stricter borrowing requirements than other conventional loans. Here are a few of the requirements you’ll need to meet:

• Credit score. The credit score needed for a conforming loan starts at 620, but lenders will probably require even higher credit scores for jumbo loans.
• DTI. As we mentioned, the DTI you’ll need for a jumbo loan ranges from 36% to 43%. It’s better to be on the safe side and have a DTI of no more than 26%.
• Cash reserves. Lenders of jumbo loans will want to know that you have money in the bank in case of an emergency. They usually require enough money to cover 6 to 12 months of expenses in cash reserves.
• Sufficient income history. It’s not enough to have an income high enough to qualify for a jumbo loan. Lenders usually look at the past two years of tax returns to ensure that you can maintain that level of income.
• Down payment. As we mentioned, jumbo loan lenders usually require a higher down payment than conforming loans. You should expect to put down at least 20% of the home price.
• Closing costs. Like other types of loans, jumbo loans require closing costs to pay for lender fees, title company fees, an inspection, and more. Conventional closing costs tend to range from 3% to 6% of the purchase price, but jumbo loans can be much higher at 5% to 8%.

Other costs of homeownership

Your monthly mortgage payment may be the largest cost of homeownership, but it’s not the only one. First, if you live in an area with a homeowners association, you’ll also be on the hook for HOA fees, which can range from hundreds to thousands of dollars per year.

Another major cost of homeownership, and one that many people don’t consider before buying a home, is maintenance. Experts generally recommend setting aside at least 1% of your home’s value each year for maintenance fees. For a $1 million home, that means you’d want to save at least $10,000 per year, and therefore at least $20,000 per year for a $2 million home.

Another cost to consider when buying a home is furnishings, especially if you’re buying your first home. Many people either don’t have the furnishings to fill their home or want to buy new items to match their new home. You can easily spend tens of thousands of dollars on furnishings, so you’ll want to have that money saved before you put an offer on a home. And the larger the house, the more furniture you’ll have to buy.

FAQs

What is the monthly payment on a $1 million mortgage?

The monthly payment on a $1 million mortgage would be about $5,368, assuming an interest rate of 5%. However, the exact amount will vary depending on the interest rate you qualify for and other factors. The actual payment would be even higher when you consider taxes and homeowners insurance costs.

How much income do I need for a $1 million mortgage?

The income you’ll need for a $1 million mortgage depends on a variety of factors, including your other debt payments, interest rate, property taxes, and homeowners insurance.

For someone with no other debt, you would likely need an income of at least $19,444 per month. If you have debts other than your mortgage, expect lenders to require an even higher monthly income.

What income do you need for a $900,000 mortgage?

The income you’ll need for a $900,000 mortgage depends, again, on the interest rate you qualify for, your other debts, and your homeowners’ insurance payments. It’s likely you would need a monthly income of at least $17,500.

Erin Gobler

Erin Gobler is a Wisconsin-based personal finance writer with experience writing about mortgages, investing, taxes, personal loans, and insurance. Her work has been published in major outlets, such as SuperMoney, Fox Business, and Time.com.