Is a 1.6 Million Dollar Mortgage Excessive for an Income of 180k in New Jersey?

When mortgage interest rates were at 3%, the cost of interest alone for a 1.6 million dollar mortgage at 2021 rates would have been around 48,000 per year. Taxes in New Jersey, known for being one of the higher tax states, could add another 16,000 on top of that, bringing the total cost to 64,000 per year. This cost would be roughly 36% of a gross income of 180,000. However, let's consider the after-tax income which is likely around 120,000, making the cost closer to 53.3% of after-tax income, which is quite significant.

Current Scenario (2023)

Now, with interest rates rising to at least 6%, the yearly cost for interest alone on a 1.6 million dollar mortgage would be 96,000. In New Jersey, property taxes are often 3% of fair market value, so for a house valued at 2 million, property taxes could be around 60,000. This brings the total yearly cost to 156,000, which is over 50% of the take-home pay and almost 100% in terms of the remaining after-tax income. At these rates, it would indeed be considered too expensive for most individuals.

Debt Service Ratio and Qualification

Banks generally set a limit of no more than 26-28% of income to be devoted to mortgage payments, which include principal, interest, taxes, and insurance (PITI). The total debt service, including mortgages, car loans, student loans, alimony, and credit card debts, should not exceed approximately 38% of income. For a carried balance on credit cards, each month, the debt is calculated at 5% of the carried balance.

Assuming a 7% interest rate and a 20% down payment, the monthly mortgage payment for a 2 million dollar property would be approximately 12,800, including taxes and insurance. Lenders evaluate loans based on the borrower's debt-to-income (DTI) ratio. The maximum for a loan is 43%.

If you have no other debt and a gross income of 15,000 per month, you would be able to qualify for a purchase price around 1,100,000 with a 20% down payment. However, if you have debt payments of 500 per month, your qualifying price drops to about 1,000,000.

Personal Perspective

Personally, I would be surprised if you could qualify for a 1.6 million dollar mortgage on an annual income of 180,000. Even if you can obtain financing, it is a significant financial risk. Many lenders and financial experts would caution against such a large mortgage, given the high interest rates and the limited income available after covering other necessary expenses and potential debt.

It is crucial to carefully consider the financial impacts, including long-term stability, interest rate fluctuations, and potential future unforeseen circumstances. This kind of debt could become overwhelming and may lead to financial strain or even hardship.

In conclusion, while such a large mortgage might seem feasible when interest rates are low, the current higher rates and the high cost of living in New Jersey make it an unwise financial decision, particularly given the current 6% interest rate environment. It's essential to evaluate all these factors and consider alternative options before proceeding with a large mortgage.