Can You Afford a Million-Dollar Home? Here's How to Know

There's actually a pretty simple way to find out.

If you're been looking to buy a home, you're no doubt aware that U.S. property values have been elevated for the past couple of years. Throw in the higher mortgage rates that emerged in 2022, and it's easy to see why so many prospective buyers have struggled.

In February, the median existing home sold for $363,000, according to the National Association of Realtors. But many U.S. homes are worth a lot more money than that. In fact, citing Census data, Today's Homeowner reports that the number of million-dollar homes has more than doubled between 2015 and 2021. And now, at least one-third of homes are valued at $1 million or more in 14 cities.

If you earn an average salary, then a million-dollar home may be out of reach for you. But if you're a higher earner, you may be able to swing one. Here's how to know.

It's a matter of crunching the numbers

It's often the case that home prices are notably elevated in metro areas where salaries are higher. So if you're looking at a million-dollar home, you're not necessarily looking at a mansion. In some areas, $1 million won't buy you much more than a starter home.

But no matter what type of home you're looking to purchase, it's important to not get in over your head financially. The last thing you want to do is take on a mortgage you risk falling behind on.

To see if you can swing a million-dollar home, you'll need to see if it's possible to pay for one along with any peripheral housing expenses without exceeding 30% of your income. That's the general rule of thumb for home purchases.

So, let's say you bring home $15,000 a month in your paycheck. That means you can pretty comfortably spend up to $4,500 a month on housing expenses, provided you don't have any other notably large expenses. If you can only afford to put down $200,000 on a $1 million property, and you're looking at a 30-year fixed mortgage at 6.5%, then your monthly principal and interest payments alone will surpass $4,500.

But let's say you have $400,000 available for a down payment. Maybe you've been saving for years, or you have a starter home to sell that you have a lot of equity in. In that case, you're looking at around $3,800 in principal and interest on a 30-year fixed mortgage at 6.5%. So in that case, you might be able to swing a million-dollar property if the local real estate taxes and homeowners insurance rates aren't too high.

Don't get in over your head

It can be harder to sell a million-dollar home than one that's more moderately priced. So it's important to really run those numbers carefully before committing to a home purchase.

The last thing you want to do is buy a million-dollar home only to find yourself perpetually cash-strapped. And don't kid yourself -- that can happen even if you earn a high salary.

Also remember that a million-dollar home might require more maintenance than a less-expensive property. Be sure to leave room for those expenses so your budget isn't thrown completely out of whack.