The Ideal Mortgage Amount Is $1 Million

The ideal mortgage today here in Birmingham is 1 Million Dollars.  This is based on the premise that the ideal income is $200,000 per person, (I’ll explain in my next article) low interest rates and the fact that the government will subsidies you mortgage up to $1,000,000.

In 2002, a $1 million mortgage cost around $50,000 to $65,000 a year in interest expense with mortgage rates at 5%-6.5% for a 30-year fixed. Multiply the annual interest expense by three, and you get $150,000-$195,000, the minimum annual income recommended to take out such a loan.

In 2016, a $1 million mortgage costs around $32,500 to $39,400 a year in interest expense with mortgage rates are now 3.247%-3.937% for a 5ARM to a 30-year fixed. Multiply the annual interest expense by three again and you get $97,500 to $118,200, a far cry from the $150,000-$195,000 you originally needed to make!


It is aggressive to think that someone who only makes $97,500 a year in gross salary can afford a $1 million mortgage, but it’s also absurd that one can borrow $1 million dollars nowadays for only 3.247%! I’m not recommending everyone with impeccable credit scores, great financial habits, and steady savings rates all get $1 million mortgages. I’m am saying that it’s now possible for someone making $97,500 a year to service $1 million worth of debt at 3.247% if the bank approves.


Let’s look at an example:

You have a household income of $250,000 a year, you have two children, you have $200,000 equity in your current home and you want to move to Liberty Park.  With a $1,000,000 mortgage your adjusted gross income is $160,000 ($90,000 in exemptions and itemized deductions) and you're in the 33% marginal tax bracket. You’re interested in this home at 7331 Old Overton Club Drive in Liberty Park, behind the gate, listed for $1,150,000, you put down $150,000.  Your principal and interest payment would be $4,738, taxes would be $393, and insurance about $67 for a total monthly payment of $5,591.  The government would be subsidizing you first year’s payments to the tune of $13,200 or $1,100 per month.  You live in the house for seven years it appreciates at a rate of 8% a year making it worth $1,713,824 in 2023, your montage payout is $864,092.  Your interest expense totals $135,908 of which the government reimbursed you $44,849.  You sell the house for $1,713,824 pay off the $864,092 netting you $849,732 plus the reimbursement from the government of $44,849 totaling $894,581 return on your investment of $150,000 or 11.7% per year.

 Five Reasons Why the Ideal Mortgage is $1,000.000

1) It is the law of the land. The maximum mortgage interest indebtedness is $1 million dollars according to the IRS ( effective 2018 that amount drops to $750,000); if you have a $2 million dollar mortgage that costs $80,000 a year in mortgage interest, only $40,000 of the mortgage interest can be deducted from your income. Your tax savings is simply $40,000 times your tax rate. The IRS also stipulates that you can deduct the interest on a $100,000 Home Equity Line Of Credit if the money is used other than to build, improve or purchase your home. When you figure that out let me know. (12/17: the new tax law would reduce the maximum mortage intrest deduction will be reduced to a $500,000 mortgage)

2) Your chance to maximize your government subsidy. The home mortgage interest deduction is one of the largest government subsidies available to you and me. The government wants you to own your home so it helps subsidize your lifestyle and lower your taxes. To not take full advantage of such subsidy is a shame, consider it your duty.

3) Debt keeps you working hard. When I started my first job out of college my boss encouraged me to buy a nice car and take out a sizable loan. If you owe money it’ll give you a motive to get up in the morning and go to work.

4) Asymmetric risk and reward. In America, when you borrow a ton of money from a bank and can’t pay it back one day, you don’t get stoned to death or impaled in the heart by a spear. Instead, you hand back the keys to the bank who agreed to take on your home as collateral in case of non payment. Alabama is a recourse state, meaning that the lender can come after your other assets to recover any shortfalls. Thus a short-sale or foreclosure will temporarily slaughter your credit score for 3-7 years. If you happen to invest in the right real estate cycle, you can make a massive amount of money when you finally sell or rent the property out without having to give the bank any of the upside!

5) You need to make closer to the ideal income. How much mortgage interest you can fully deduct is based on how much money you make. Make too much, and your mortgage interest deductions get phased out. Make too little, which is under $79,500 based on existing rates, and you will feel the strain of the mortgage payments. If you or your household make between $150,000-$300,000, you are in the sweet spot to take on a $1 million dollar mortgage. Be aware if you have an adjusted gross income of over $166,800, your mortgage interest starts to get phased out. For every $100 of income over $166,800 you lose $3 of itemized deduction times 33.3% up to a maximum loss of 80 percent of your itemized deductions.

What is your ideal mortgage?

Here in Birmingham we have wonderful $500,000 homes, but if you want to live in the villages or in a gated community you may need to borrow $1 million dollars. If this is where you find yourself then consider $1 million dollars as the cap on how much you should borrow and calculate your mortgage payment to income ratio, loan-to-value ratio, and home value to cash left over after down payment ratio.Some of you reading this have liquid assets north of $1 million dollars. A $1 million dollar mortgage is then nothing to be afraid of because everything is just accounting. Your goal in this low interest rate environment is to minimize your debt interest expense by refinancing your mortgage and maximizing your government subsidies. Imagine refinancing your mortgage to 3.25% while making 10%+ returns on your investment? You’re essentially borrowing money for free and then some! 

Don’t be afraid of mortgage debt. Instead, cherish what the government has given us and live a wonderful life knowing you are optimizing your finances. Finely if you feel you can handle a $1 Million mortgage and are looking for the right home get touch with me. I specialize in selling Million Dollar Homes.  This is an example of a fantastic real estate investment; a one of a kind home in Old Mountain Brook, it's like buying the Hope Diamond, it will only appreciate in value with time.  Check it out in my Featured Listings.



 Invite Kerry to speak to your group about the changing Luxury Home Market in Birmingham.   205 919 6006

Kerry Grinkmeyer is a real estate agent in Birmingham, AL specializing in the marketing and sales of luxury homes. Kerry's a retired financial advisor, he sold his firm, one of the largest in the Ameriprise Financial Advisor system in 2005 to his son, daughter and nephew.   Now he's building one of the largest boutique real estate agencies that he'll eventually sell to his grandchildren.  He the author of the children’s book The Christmas Web- A Family Christmas Tradition.  Kerry competes in the Senior Olympics in to 50M, 100M and 200M dash as well as the 5k and 10k time trial cycling events.

Kerry offers you his financial background, knowledge of the community, love of business and family and energy to assist you in one of the most important financial decisions you'll make in your lifetime.

205 919 6006


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