How Much Do I Need To Earn Each Year To Afford A $550,000 Home?

Hunting for a home costing up to $550,000? You'll be looking for a property in the higher end of the housing market, considering that the median sales price of an existing home stood at $407,200 in September, according to the National Association of REALTORS^®.

While buying a home at any price point is exciting, it's important to make sure that your income is high enough that you can afford the monthly mortgage payments that come with a $550,000 home. You should also factor in your monthly debts. It's important to create a household budget to determine how much money you can devote each month to your mortgage, no matter your income.

Wondering if you can afford a $550,000 home? Here are the monthly costs associated with owning such a home and some tips to make sure that this level of home fits comfortably in your budget.

The Quick Answer

How much income you need to purchase a $550,000 home depends on a variety of factors, including the size of your down payment and your monthly interest rate. But in general, you want to earn three to four times as much as what you pay annually for your mortgage, preferably about 28%. In this case, that means about $162,000.

What Factors Determine How Much Home You Can Afford?

Several factors help determine how much home you can afford. The price you pay for your home plays the biggest factor. Your odds of finding an affordable home rise if you want to live in the states with the least expensive homes. If you want help determining how much home you can afford, try the Rocket Mortgage^® home affordability calculator.

But other factors also impact how much you’ll pay each month for a mortgage:

Your Down Payment

If you come up with a down payment of at least 20% of your home’s purchase price, you won’t have to pay for private mortgage insurance, which protects your lender if you fail to make your home loan payments. You aren’t required to come up with such a large down payment, though. You might qualify for a mortgage that requires a down payment as low as 3% of your home’s purchase price. A down payment of 20% on a $550,000 home is $110,000. A down payment of 3% on the same home is a more manageable $16,500.

Closing Costs

Your lender will charge closing costs when you take out a mortgage. These can run from 3% to 6% of your total mortgage amount. Say you provide a down payment of $50,000. For a mortgage of $500,000, closing costs would come to $11,000 to $33,000. Some lenders might allow you to roll your closing costs into your loan amount. Instead of paying them up front, you’d pay them over time, making larger monthly mortgage payments.

The Type Of Mortgage

You can choose from several loan types when you apply for a mortgage. The type you choose will help determine how expensive your monthly payment is. If you come up with a down payment of $50,000 and take out a $500,000 30-year, fixed-rate mortgage with an interest rate of 6.75%, your monthly payment, not including property taxes and homeowners’ insurance, will be $3,242.99.

If you instead choose a 15-year, fixed-rate mortgage of $500,000 at an interest rate of 6.45%, your monthly payment without insurance or taxes will be $4,341.81. While that payment is higher, you’ll pay far less in interest over time with a shorter-term mortgage.

Your Interest Rate

The higher the interest rate attached to your mortgage, the more expensive your monthly payment will be. If you are paying off a $500,000 30-year, fixed-rate mortgage with an interest rate of 7%, your monthly payment not including insurance and taxes will be $3,326.51. If you take out that same mortgage but with an interest rate of 6.45%, your monthly payment without taxes or insurance will be $3,143.92. Check out today’s mortgage interest rates.

Credit Score

Your three-digit FICO^® credit score is a measure of how well you’ve paid your bills and managed your credit in the past. If you have a high score, you’ll typically qualify for a lower interest rate on your mortgage. FICO scores run from 300 to 850, with lenders considering scores of 740 through 799 to be “very good” and those over 800 to be “exceptional.” If your score is in the “very good” or “exceptional” range, your odds of qualifying for a lower interest rate are higher.

Loan-To-Value Ratio

Your loan-to-value ratio, or LTV, is a percentage that measures your loan amount against the value of your home. Say you buy a home for $550,000 and you come up with a down payment of 10%. Your LTV is 90%, meaning that your mortgage is equal to 90% of your home’s current market value. Lenders typically assign higher interest rates to loans with higher LTVs because they are taking on more risk. A higher LTV results in a higher monthly mortgage payment because you are borrowing more money and you’re usually borrowing it a higher interest rate.

Homeowners Insurance

When you take out a mortgage loan, you’ll need to apply for a homeowners insurance policy. Most lenders also require that homebuyers set up an escrow account with their mortgage. With each monthly payment, you’ll send extra money to cover homeowners insurance and property taxes. Your lender will deposit this money in the escrow account, drawing from it to pay your homeowners insurance and property tax bills on your behalf when they are due. In 2024, the average homeowners’ insurance policy cost $1,117 to $2,950 a year. If you pay $1,200 a year, you’ll pay an extra $100 each month with your mortgage payment to cover your yearly insurance premium.

Property Taxes

The amount you pay each month in property taxes will also impact your monthly mortgage payment. The Tax Foundation said that in 2022, the average annual property tax bill in the United States was $1,815. But that figure varies widely depending on where you live. For instance, the Tax Foundation said that 15 counties in the United States have annual average property tax bills of more than $10,000. Say your annual property tax is $6,000. You’d pay $500 extra each month with your mortgage, dollars that your lender will deposit in your escrow account. Depending on where you live, your monthly property taxes can significantly increase your monthly mortgage payment.

What Salary Do I Need To Afford A $550,000 Home?

How can you determine how much you need to earn each year to afford a $550,000 home?

Several factors go into determining how much home you can afford.

Let's assume that you come up with a down payment of 10%, which comes to $55,000. Now let's say you take out a 30-year, fixed-rate mortgage to cover the remaining $495,000 of your home's purchase price. If your interest rate is 6.78%, that would leave you with a monthly mortgage payment, not including anything you'd pay for property taxes and homeowners' insurance, of $3,220.44.

But if you're like most homeowners, you'll also pay for taxes and insurance each month. Let's round that monthly payment up to $3,700 to include those extra costs, a figure that will vary depending on where you live and the size of your home. A full year of $3,700 mortgage payments equals $44,400.

The traditional suggestion is that the amount you spend each year on your mortgage should not equal more than one-third of your annual income. That might not be the most accurate measure of how much you’ll need each year, though, for a $550,000 home. That’s because most financial experts say that you should spend no more than 28% of your gross monthly income on your mortgage payment.

A yearly income of $133,200 comes to a gross monthly income of $11,100. A mortgage payment of $3,700 equals a bit more than 33% of that monthly gross income, higher than the recommended 28%. Because of this, you might need a higher annual salary to comfortably afford that $550,000 home.

If you instead earn $162,000, your gross monthly income would be about $13,500. A total of 28% of that figure is about $3,780, meaning that your $3,700 mortgage payment would fall within that recommended 28% range.

To comfortably afford a $550,000 home? Aim for a yearly salary of about $162,000.

How Much Down Payment Do I Need For A $550,000 House?

There is no required minimum down payment for a $550,000 house. But if you come up with a down payment of 20%, you won’t have to pay for private mortgage insurance (PMI). A 20% down payment on a house of this price is $110,000.

The cost of PMI varies, but Freddie Mac says that you can expect to pay from $30 to $70 each month for every $100,000 you borrow. If you borrow, say, $500,000 after coming up with a down payment of $55,000, you’d pay from $150 to $350 a month for PMI.

PMI doesn't last forever. If you build equity of 20% in your home, you can request that your lender cancel this insurance. If you are current on your mortgage payments, your lender will automatically cancel PMI when your principal balance reaches 78% of your home's original appraised value. You’ll have to determine if you want to pay extra with your mortgage payment or come up with the extra dollars needed for that 20% down payment.

You might qualify for a conventional mortgage, one not insured by a government agency, with a down payment as low as 3% of your home’s purchase price. If your FICO^® Score is at least 580, you might qualify for an FHA loan with a down payment of just 3.5% of your home’s purchase price.

Individual lenders will vary, though, on how large of a down payment they require. Some lenders require larger down payments when you are borrowing more money.

Remember that your down payment is just part of the cost of buying a home. You’ll also need to come up with money for closing costs and any savings reserves that your lender requires. You can use the Rocket Mortgage down payment calculator to help determine how much cash you’d need to buy a $550,000 home.

How long it takes to save for a down payment on a $550,000 home depends on the size of your down payment and the number of years you can devote to saving. Say you want to save up enough for a down payment of 10%, or $55,000, in 3 years. To reach this goal, you'd need to save $1,527.78 each month. If you wanted to save the same amount in 5 years, you'd need to save $916.67 each month.

Tips For Buying A $550,000 Home

Interested in buying a $550,000 home. Here are some steps to reach that goal.

• Make sure you can afford it: Draft a household budget listing your monthly expenses and income. Estimate the cost of expenses that fluctuate each month. Be sure to include discretionary spending, such as eating out and entertainment. Once you’ve done this, you’ll see how much money you can afford to spend each month on a mortgage payment.
• Build your credit score: The higher your credit score, the lower your loan’s interest rate will be, which will leave you with a smaller monthly mortgage payment. Pay your bills on time and pay down as much of your credit card debt as you can. These two steps will help improve your credit score.
• ·Save for your down payment: If you are buying a $550,000 home, your down payment will be significant. Start saving for it early.
• Get preapproved: It’s important to get preapproved by a lender before you begin shopping for a home. During preapproval, a lender will pull your credit and verify your income to determine how much of a mortgage it is willing to give you. It will then give you a preapproval letter stating this amount. This lets you know whether you can qualify for a mortgage for a $550,000 home. It also gives you an advantage if you get into a bidding war for a home: Most buyers prefer working with borrowers who are already approved for mortgage financing.

The Bottom Line

Before you begin your search for a $550,000 home, it’s important to make sure that you can afford the mortgage that comes with it. If you’re ready to make the move to homeownership, start the mortgage application process with Rocket Mortgage today.