For many buyers the answer does not involve upper-income tax brackets or a few choice words in the wills of the rich and famous. Instead, buyers in the $1 million range are often long-time property owners who have seen their equity grow over time. The result is an ability to buy large homes with low-risk financing and sometimes with no financing at all.

The Value of Equity

To understand where the cash comes from consider that across the country we have a number of areas where rising real estate values are a major source of personal wealth. The Office of Federal Housing Enterprise Oversight says that during the 25 years between 1980 and March 1, 2006 home prices nationwide rose by an average of 294 percent nationwide.

The catch is that home values did not rise equally in all locations.

Among the winners, typical property owners during the past quarter century saw values increase 518 percent in the District of Columbia, 534 percent in California, 547 percent in New York state, 507 percent in Rhode Island and a whopping 636 percent in Massachusetts. No less interesting, typical prices doubled during the past five years in the District of Columbia (124 percent), Florida (111 percent), Hawaii (113 percent), Maryland (101 percent), Nevada (106 percent), and California (115 percent)

What these numbers mean is that in San Francisco, New York, Los Angeles, Boston, Miami, Las Vegas, Washington, Phoenix and other high-growth metro areas long-time property owners may well have substantial real estate equity.

For such individuals the sale of their long-term residence and the purchase of a $1 million replacement house could actually mean moving to a less expensive property -- downsizing. In some cases, these property owners have accumulated so much equity that they can actually buy a million-dollar home for cash.

Here's a best-case example: Imagine buying a $175,000 home in Boston in 1980. With 10 percent down ($17,500) that home today could be worth around $1,113,000. No less important, because mortgage rates ranged from approximately 12.7 to 16.3 percent in 1980, you can bet that our model property was purchased in a buyer's market with lots of discounts and then refinanced repeatedly at lower rates over the years.

Traditional Loans

For borrowers with strong equity, solid credit and a reasonable income it's possible to use plain-vanilla FHA, VA and conventional financing to buy homes in the upper brackets.

For 2006, the FHA loan limit is $362,790 for a single-family home in the lower 48 states (but 50 percent higher in Alaska, Hawaii, Guam, and the U.S. Virgin Islands). As to VA loans, the general limit is $417,000. The result is that to buy a $1 million property with these programs would require between $583,000 and $637,210 in cash or additional borrowing -- plus closing costs.

The conventional loan limit for a single-family home is $417,000 in 2006. Again, a buyer would need $583,000 in cash or second loans to close the sale with conventional plus additional dollars for settlement costs.

In each of these cases, of course, the necessary cash for many long-term property owners can be obtained through the sale of their current residence.

Big Incomes

But what about people with big incomes and little or no real estate equity. Can they buy a $1 million home?

The answer for a growing number of buyers is yes.

A "jumbo" loan, for example, is simply a mortgage with 20 percent down, conservative qualifying standards and a mortgage amount above the conventional loan limit. Because jumbo loans mean more lender risk the interest rate tends to be a touch higher, maybe 7.0 percent in a market where 6.75 percent conventional financing is available.

Suppose you wanted to buy a $1,000,000 home with $200,000 down and an $800,000 jumbo mortgage. Closing costs would be extra.

At 7 percent over 30 years, an $800,000 jumbo loan would require fixed monthly payments of $5,322.42 for principal and interest. Interest at the end of the first year would amount to $55,743 -- an amount which is likely deductible for income-tax purposes. (See a tax professional for specifics.)

To afford such a loan lenders look at credit scores, property appraisals, qualifying ratios and other factors. With a jumbo loan a lender might require qualifying ratios of 33/38 -- that is, up to 33 percent of your gross monthly income (income before taxes) can be used for housing costs such as principal, interest, taxes and insurance ("PITI") and as much as 38 percent can be used for PITI plus regular monthly costs such as credit card bill and auto payments.

Let's say that $5,322 is the cost of principal and interest and that it costs another $1,000 a month for taxes and insurance, a total of $6,322 for PITI. If $6,322 can equal no more than 33 percent of your gross monthly income, it means you must earn roughly $191,570 annually to qualify for an $800,000 loan at 7 percent over 30 years.

Could you get an $800,000 loan with less income? Yes -- if interest rates fall, if particular loan programs have more liberal qualification standards or if you use financing that allows negative amortization or interest-only payments during the first few years of the loan term.

Sticker Shock

The strategies mentioned above use conservative financing methods however there are other ways to buy million-dollar homes. For example, one could get a loan which allows such low payments up front that the mortgage debt actually grows each month -- a process called negative amortization. The risk? Once the comfy first few years of low payments end, the monthly expense for such loans can double. While "neg am" mortgages can work for a limited number of borrowers, many are better served with other forms of financing.

Final Thoughts

First, the odds of being able to afford a million-dollar home increase if you're a long-time real estate owner and live in a community with soaring home values. Notice that you didn't have to own one home for 25 years to benefit from rising real estate prices, a series of homes owned over a period of years will generally produce a like result. Notice also that marketplace results seen in the past do not guarantee such outcomes in the future.

Second, in some areas a million-dollar home is a mansion, while in others it may be the cheapest house on the block, a good candidate for a tear-down. In other words, in some areas your real estate dollars go much further than in others.

Third, while the million-dollar home is a benchmark of our time, whether such a home is right for you depends on what's affordable, what's financially comfortable and your personal preferences. After all, a lot of well-to-do people live quietly and comfortably in less expensive neighborhoods -- even though they can easily afford much bigger and grander houses.

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Peter G. Miller is a syndicated real estate and personal finance columnist who appears in more than 90 newspapers. He writes a bi-monthly column exclusively for Mortgage Lenders Plus.com, an advertiser supported mortgage directory featuring home mortgage lenders nationwide for refinancing, second mortgages, and home loans.