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How Big a HELOC Should I Get?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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You’ve diligently made your mortgage payments for years, eagerly checking the principal balance on your monthly statements as it continues to shrink. Bottom line? You’ve built up a significant amount of equity in your home, and you want to use it.

Whether you intend to finance a home improvement, pay down high-interest debt, or put a kid through college, the flexibility of a home equity line of credit makes it a useful tool for homeowners.

Of the multiple ways you can access the equity in your home, a HELOC is unique in that it is a revolving line of credit — much like a credit card. You spend the money as you need it, then pay it back with interest. A HELOC differs from credit cards, though, because your home is used as collateral.

When you apply for a HELOC, your lender will approve you for a certain amount, and you withdraw funds as needed — up to your limit — during a specific time frame, called the draw period.

One of the first steps in leveraging a HELOC is to determine how much to borrow. This guide will walk you through how to decide.

First, do you qualify for a HELOC?

Before you decide how much to borrow, you need to make sure you can qualify for a home equity line of credit in the first place. To determine if you qualify for a HELOC, your lender will consider multiple factors.

Equity in your home. The most important criteria for getting approved for a HELOC is the amount of equity in your home. To figure out your equity, you subtract the amount you still owe on your mortgage from the current market value of your home.

For example, if the value of your home is $300,000 and you owe $200,000 on your mortgage, then you have $100,000 in equity. The more equity you have, the more likely you are to qualify.

Credit requirements. Lenders put a lot of weight on your credit history and credit score when approving you for a HELOC. The better your score, the more likely you are to qualify and the lower your interest rate will be.

Some lenders have a minimum credit score requirement or credit history stipulations — for example, Chase Bank requires a score of 680 in most cases. While you may still be approved for a HELOC with a low credit score or blemishes on your credit report, it will come at a much higher rate.

Your debt-to-income ratio. Another essential factor lenders will weigh is how much of your income will be going towards debt, factoring in the future HELOC. They want to ensure that you’ll be able to handle all of your obligations.

To do this, banks calculate your debt-to-income ratio (DTI), which is the total of all of your debt payments — mortgage, student loans, credit cards, car loans, etc. — divided by your monthly pre-tax income.

For example, if your monthly payments including the expected payment on the HELOC total $2,000 and your gross monthly income is $5,000, then your DTI would be 40% ($2,000 ÷ $5,000).

Many lenders look for a DTI of 43% or less, though some will allow a higher DTI when taking into consideration other factors.

Employment. Lenders want to know you have a sufficient and regular source of income to support your payments and will verify your income during the application process, much like when you first applied for a mortgage.

Exact eligibility guidelines including additional requirements vary by lender, so be sure to check the qualification criteria of your bank.

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HELOC limits

The amount of equity you have in your home is just one piece of the puzzle when it comes to how much you’ll be able to borrow. Most lenders have limits and stipulations in place that determine just how much of your equity you can access.

So before you begin drafting your kitchen remodel plans, you’ll want to familiarize yourself with your lender’s guidelines.

Banks typically have minimum and maximum amounts for their HELOCs. For example, HELOCs at Wells Fargo range from $25,000 to $500,000.

Additionally, banks will use your loan-to-value ratio (LTV), the percentage of your home value that you owe, to determine the maximum amount to lend you. Your LTV is calculated by dividing the amount you owe on your home by the value of your home.

Many lenders want a loan-to-value ratio of 85% or less, including the HELOC you are looking to take out. This varies by lender, as well as by state and type of property: some lenders cap you at 80%, while others allow a higher LTV of 90% or more.

Using our example earlier, if you owe $200,000 on your mortgage and your home is valued at $300,000, then your current LTV is 67% ($200,000 ÷ $300,000).

To determine the amount of HELOC your lender will allow, you would first calculate the total amount you can owe on your home based on the bank’s maximum LTV, and then subtract your current mortgage from it.

If the lender in our example allows a loan-to-value ratio of 85%, then the maximum amount they will let you owe on your home including the first mortgage and the HELOC is $255,000 ($300,000 x .85).

So if you already owe $200,000 on your mortgage, then the most you could take out in a HELOC is $55,000 ($255,000 – $200,000).

Here’s another example. Let’s take the same $300,000 home but let’s say you owe $250,000 and have $50,000 in equity.

With the lender’s maximum LTV at 85%, the most you can owe on the home is $255,000. Since you already owe $250,000 on your mortgage, the maximum amount you could borrow is $5,000, which may be under the minimum HELOC amount at most lenders.

So it’s important to remember that just because you have some equity in your home, it is not a guarantee that you will be able to borrow against it. Again, be sure you know your lender’s guidelines.

Should I take out the maximum HELOC I qualify for?

The flexibility of a HELOC may tempt you to withdraw the full amount you qualify for, but just because you can take out a large amount of money doesn’t mean you should.

Here’s what to think about when deciding how big of a HELOC to borrow.

Monthly payment

During the draw period, some lenders allow interest-only payments, while others require you to pay both principal and interest.

In either case, the amount you borrow along with the interest rate will determine the size of your payments both during the draw period and the repayment period. You’ll need to be sure that your budget can handle the payment in both periods.

Purpose of the funds

“What are you taking the HELOC out for?” asked San Diego-based financial advisor Scott Stevens, who advises clients at California Wealth Transitions. He said the answer to that question plays a significant role in determining the amount you should borrow and whether a HELOC is the best option for you.

If you are funding an expense with a high price, be sure that the amount you are eligible for will cover the cost. On the other hand, if you are looking to borrow just a few thousand dollars to do minor upgrades in your home, Scott advised that other options, like a credit card with a low introductory rate, may be a better way to go.

Impact to your credit score

How much you decide to take out and how much of your HELOC limit you actually use will affect your FICO score. If you max out your HELOC limit, that can hurt your score, but keep in mind that taking out more than you need can be expensive if your lender requires you to make minimum withdrawals.

Out-of-pocket expenses and fees

In most cases, lenders will verify the market value of your home without doing an appraisal. However, the amount you wish to borrow could trigger the need for an appraisal, which would be at your expense, Stevens said. You likely will also pay an annual fee on your HELOC throughout the life of the loan.

Tax implications

One of the long-standing appeals of the HELOC used to be the ability to deduct the interest paid on it during tax season. The tax reform law passed in 2017 has changed that — now, the only part of the HELOC that you can write off is the amount that you use to buy, improve or add on to a primary residence (or potentially a second home), Stevens told MagnifyMoney.

So if you are thinking of borrowing $50,000 with a plan to use $30,000 for home upgrades and $20,000 to pay off credit cards, you will only be able to deduct the interest paid on $30,000, the amount you used to improve your home.

The new law, which is in effect from 2018 through 2026, also places new dollar limits on the combined amount of mortgages that can qualify for the home mortgage interest deduction.

Currently, those amounts are $750,000 or, specifically, $375,000 for married couples filing separately. So if a married couple who files jointly has a mortgage balance of $650,000 and is looking to take out a $200,000 HELOC, only the interest on $100,000 of the HELOC will be tax deductible to stay within the $750,000 limit.

With these tax changes, Stevens said many of his clients are seeking alternatives to borrowing from a home equity line of credit if they plan to use the funds for reasons other than on their homes.

Future home value

No one can guarantee the direction home values will go, but when deciding how much to take out in a HELOC, keep in mind that you are eating into your home’s equity. Depending on how much you borrow, should home values drop significantly in the future you could find yourself owing more than your home is worth.

Having access to more money than you need

“The good thing about a HELOC is it’s revolving credit,” Scott said. “So, just because you open up a $50,000 line doesn’t mean you have to use all $50,000.” With that said, consider whether or not having access to more money than you need may be too much of a temptation for you. If so, you may want to choose an amount close to what you need to spend.

Keep in mind, many lenders will allow you to increase the amount of your HELOC in the future, provided you qualify.

The bottom line

It’s important not to see the equity in your home as free money. While it can be a cheaper way to borrow when compared to other options like personal loans or credit cards, you can potentially put your home in jeopardy should you run into trouble making your payments in the future.

Furthermore, borrowing against the equity of your home means extending the amount of time it will take to pay off your home.

If you do decide to move forward, Stevens stressed the importance of shopping around for the best terms. “Make sure you research a few places,” he said. “If you’re at a big bank, check with a couple credit unions. If you’re at a credit union, check with a couple of big banks.”

Additionally, online lenders may offer some competitive terms. With the multiple options available, spend some time reviewing and comparing lenders. And like with any form of debt, make sure you understand what you are getting into.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Alaya Linton
Alaya Linton |

Alaya Linton is a writer at MagnifyMoney. You can email Alaya here

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How to Rebuild Equity on an Underwater Mortgage

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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There are some things you can’t control as a homeowner, such as natural disasters, neighbors or the direction of home values. If these happen to take a nosedive, you could watch the equity you’ve built in your home disappear.

In fact, more than 5 million homeowners are “seriously underwater” on their mortgages — meaning the amount of debt attached to their home is at least 25% higher than the home’s value, according to the latest data from ATTOM Data Solutions, a property research firm. If you’re one of these homeowners, don’t despair. There are ways to rebuild the equity on an underwater mortgage. In this guide, we’ll explain what it means to have a mortgage underwater and how to rebuild the equity you’ve lost.

What is an underwater mortgage?

An underwater mortgage is a loan with an outstanding balance that exceeds the value of the home it secures. This is also referred to as having negative equity or being upside down on your mortgage.
There are a few ways that a mortgage can become underwater:

  • Significant drop in home values
  • Multiple loans taken out against a home, and the total balance is higher than the home’s value
  • Monthly payments not covering the interest due on a mortgage (negative amortization), and the balance owed grows instead of shrinks

If you tried to sell your home while it’s underwater, the sales proceeds likely wouldn’t be enough to pay off your mortgage, which would leave you on the hook for the remaining balance. You’d also have a hard time refinancing your mortgage, since you need to have some equity available for a refinance in many cases.

How to tell when my mortgage is underwater

If your current mortgage balance is higher than your home’s current market value, then your mortgage is underwater.

For example, let’s say your home was worth $250,000 when you first bought it, and you took out a $200,000 mortgage with a 4% interest rate. Five years later, the economy takes an unfortunate tumble and home values drop by an average 40%, giving your home an approximate $150,000 value.

Based on your loan’s amortization schedule, the outstanding balance you’d owe in year five would be about $180,000. That leaves you with $30,000 in negative equity.

Negative Equity in Your Home

Estimated Home Value in Year 5


Estimated Mortgage Balance in Year 5


Available Equity


If you find yourself in a situation similar to the one described above, there are options available to help you rebuild your home equity, which we’ll discuss in the next section.

How do I rebuild equity?

Just because your mortgage is underwater doesn’t mean it has to stay that way. There are ways to start rebuilding the equity you might need to fund other financial goals.

Pay down your mortgage as usual

The most straightforward option is to continue to pay down your mortgage as you normally would. Perhaps the housing market will recover, leading to an eventual rise in home prices. Either way, as long as you’re submitting your mortgage payments in full and on time, you’ll pay it off on schedule.

You can help speed things along by paying extra toward your principal balance. There are several ways to tackle this, which might include adding a couple hundred dollars — or whatever amount is comfortable for you — to your mortgage payment each month.

Another option is to make biweekly payments instead of monthly payments. This can add up to one extra payment each year. That’s because there are 52 weeks in a year and you’d make 26 half payments, which equals 13 full payments.

Be sure to ask your mortgage lender or servicer to direct any extra money you pay on your loan toward your principal balance (not interest).

Modify your mortgage

If you’re experiencing a temporary hardship on top of your underwater mortgage and are struggling to keep up with your mortgage payments, you could benefit from a mortgage modification.

A modification is when your lender changes the original terms of your mortgage to make it more affordable for you. Changes might include:

  • Extending the number of years you have left to repay your mortgage
  • Lowering your mortgage interest rate
  • Reducing your outstanding principal balance
  • Switching your mortgage rate type from adjustable to fixed

Eligibility requirements vary, so it’s best to contact your lender for more information about how to modify your loan.

Recast your mortgage

Another way your lender can make tweaks to your existing mortgage is by recasting your mortgage — especially if you’ve recently come into a financial windfall.

A mortgage recast involves paying a lump sum of money toward your outstanding principal balance. Your lender then recalculates your monthly mortgage payments based on the lower principal balance, but your mortgage rate and term length stay the same.

You’ll need to pay at least $5,000 — sometimes more — to recast your mortgage, and you might also be charged a recasting fee, up to $500. Check with your lender for more details and requirements.
Conventional loans typically qualify for mortgage recasting, but not government-backed loans, such as those insured by the Federal Housing Administration (FHA loans) or Department of Veterans Affairs (VA loans).

Refinance your mortgage

Although the Home Affordable Refinance Program (HARP) — a government-sponsored initiative that helped nearly 3.5 million homeowners refinance their mortgages — has expired, there are other programs available that provide similar assistance.

Fannie Mae and Freddie Mac, the two major agencies that buy and sell mortgages to and from lenders that follow their guidelines, created new initiatives as HARP was ending to address those homeowners who were underwater on their conventional mortgages or have high loan-to-value (LTV) ratios. An LTV ratio is calculated by dividing your loan amount by your home’s value. Revisiting the underwater mortgage example above of a home worth $150,000 with a $180,000 mortgage balance, the LTV ratio is 120%.

Fannie Mae’s high LTV refinance option offers homeowners with an LTV ratio above 97% the opportunity to refinance their mortgage. Homeowners must be current on their mortgage payments and benefit from at least one of these options:

  • A reduction in the principal and interest portion of their monthly payment
  • A lower interest rate
  • A shorter loan term
  • A more stable mortgage, such as a switch from an adjustable-rate to a fixed-rate loan

There is no maximum LTV ratio for fixed-rate mortgages, but adjustable-rate mortgages (ARMs) have a 105% LTV maximum. The existing mortgage must be Fannie Mae-owned.

The Enhanced Relief Refinance mortgage offered by Freddie Mac also requires homeowners to be current on their mortgage payments and have an LTV ratio that is higher than allowed for a standard refinance. The maximum LTV ratio allowed for ARMs is 105%; there’s no maximum for fixed-rate loans.

Homeowners must benefit from a shorter loan term, lower principal and interest payment, lower mortgage rate and/or a move from an ARM to a fixed-rate mortgage.

If you have a government-insured mortgage — FHA, USDA or VA loan — you may be able to take advantage of a streamlined refinance, which typically has a limited credit documentation and underwriting process. Additionally, you may not need an appraisal to verify your home’s value.

  • FHA: FHA borrowers applying for a streamlined refinance must be current on their mortgage payments and benefit from at least a 5% reduction in their monthly payment amount. You may also qualify if you’re switching from an ARM to a fixed-rate mortgage or shortening your loan term.
  • USDA: Borrowers with USDA loans may qualify for the streamlined assist refinance option if they have little to no equity and are current on their payments. The benefit must come from a monthly mortgage payment that’s at least $50 lower than the existing amount.
  • VA IRRRL: The VA Interest Rate Reduction Refinance Loan program helps homeowners with VA loans by lowering their mortgage payment through a reduced interest rate. Guidelines require a minimum 0.5% rate reduction.

Other options for underwater homeowners

If you’re ready to walk away from your home or simply can’t afford it anymore, consider one of the avenues below:

Home sale

You could attempt to sell your home, with the understanding that you likely won’t make enough profit to pay off your mortgage. If you have a hefty savings account, you can use some of those funds to pay the difference between the amount your home sale covers and your outstanding loan balance.

Short sale

Another option is a short sale, which allows you to sell your home for a price that is less than the outstanding balance on your mortgage. Additionally, your mortgage lender may forgive your remaining mortgage debt. Keep in mind that your credit score will take a hit with this option — it could drop by 100 points, according to FICO.

Deed in lieu of foreclosure

A deed in lieu of foreclosure, also known as a mortgage release, is the process of voluntarily transferring the ownership of your home to your lender. In exchange, you may be released from your mortgage payments and debt. This option also prevents you from going into foreclosure.

Similar to short sales, a deed in lieu of foreclosure negatively impacts credit scores.

The bottom line

You may feel helpless if you’re dealing with an underwater mortgage, but you have options. If you’re able to manage your monthly payments as they are, it may be best to continue paying down your loan as usual, making extra payments whenever possible. But if you’re struggling or simply want to reduce your payment amount, consider a loan modification or a refinance.

Be sure to discuss your available options with your mortgage lender or servicer, and remember that maintaining on-time payments will help your case.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Crissinda Ponder
Crissinda Ponder |

Crissinda Ponder is a writer at MagnifyMoney. You can email Crissinda here

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Life Events, Mortgage

The Risks and Rewards of Out-of-State Investment Properties

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.


They say real estate is all about “location, location, location.” That’s especially true when it comes to investing in rental properties. Where you choose to buy can have a significant impact on your return on investment.

For example, in a state like New York, where the median mortgage exceeds the median rent by nearly $250, buying a property to rent out doesn’t make much financial sense. If you consider buying rental property in a different state, such as North Carolina where rents in the city of Charlotte top mortgages by $84 per month, you’ll net a profit instead of a loss every month your tenant pays rent.

Before you start the interstate home search process, you should know the risks and rewards of out-of-state investment properties.

Potential rewards of buying an out-of-state investment property

Very often, the primary reason to buy an out-of-state rental property is investment properties where you live are too expensive. There are some other more strategic reasons that we’ll cover next.

Diversify your real estate assets

Real estate markets rise and fall. During the housing boom of 2003 to 2007, many of the “sand” states, such as California, Arizona, Florida and Nevada, experienced home price appreciation at rates well above historic levels.

Investors learned a painful lesson in the danger of not diversifying when the housing markets in those states crashed during the housing crisis. Investors who had investment real estate concentrated only in these states lost big, while those who spread their portfolios out to other states fared better.

Purchase future vacation or retirement residences

If prices and rents are competitive in a state you’ve always wanted to vacation in, you may want to purchase the property first as a rental and allow tenants to build some equity for you while you generate income. After a few years, you may decide you want to spend a few months a year vacationing in the home and rent it out seasonally with a rental plan from a service such as Airbnb or VRBO.

Alternatively, you may live in a cold-weather state, such as Massachusetts, and want to retire to the warm winters of Arizona. You could put the wheels in motion on your retirement plans by buying a rental property there first that has the amenities you would want in a home for retirement.

Once you’ve pocketed some rental income and equity from renters, you can pack up for the cross-country move into the rental, throw out the snow shovel and enjoy wearing shorts instead of parkas during the holiday season.

Buy where the laws suit your rental strategy

Short-term rentals have become very popular for real estate investors, but they face legal challenges in some places. For example, New York City subways are covered with signs warning riders to avoid short-term rentals.

If you are interested in renting out your property through a service like Airbnb, buying in a state that has more flexible laws about short-term tenants is your best bet.

Net more income monthly with lower property taxes

According to a recent LendingTree study, homeowners in San Jose, California, paid on average $9,626 in property taxes each year. In Salt Lake City, homeowners pay only $2,765 per year — which means you’d have to get an additional $567 per month in rent in California just to cover the property tax expense before you could make any profit.

Risks of buying an out-of-state investment property

Like any investment, there are risks associated with buying out-of-state rental properties. We’ll discuss those next.

Long-distance property management problems

If you have a rental in the city you live in, you can deal with an unexpected tenant move-out or a late-night plumbing problem by driving over to the property and taking care of the issue yourself. But you’ll need to make some decisions about how to manage an out-of-state rental.

If you hire a property management company, they’ll take 8% to 12% of your monthly rent as a fee, eating into your monthly rent profit. If you self-manage, you’ll need to make sure you build relationships with local handymen, roofers, plumbers and pest control professionals so you have their numbers handy if a tenant emergency comes up.

State laws that restrict how you rent your property

Short-term rentals, such as Airbnb, may be a great way to generate a higher monthly income than you would get with a 12-month lease, but some cities and neighborhoods aren’t too keen on having a lot of different people coming and going through a nearby house. If the laws prohibit short-term rentals in an area you’re interested in, you’ll have to crunch the numbers to see if market rents for long-term leases provide you with a good return on your rental investment.

What to look for when considering an out-of-state rental property

When you’re buying in another state, take extra precautions to make sure you understand everything about the local housing market, building standards and how the local economy is doing before you start making offers. The last thing you want to do is end up with an out-of-state money pit.

Get a thorough home inspection

No matter how nice the home may look in pictures or at an open house, there can always be problems beyond the smell of new paint and carpet. Building standards and practices may vary from state to state and city to city, and you don’t want to be caught by surprise because you didn’t know polybutylene pipes behind the walls of homes built in Tucson, Arizona, have been known to burst without warning.

A good local home inspector will also help you understand whether a property has been built and maintained according to local building standards and identify any issues, such as an unpermitted room addition, that could cause you trouble with local housing inspectors down the road.

Interview several property management companies

Depending on the town, you may find very high-tech, organized property management shops with decades of experience or small mom-and-pop shops that offer real estate property management services. Either way, you want to know what they do for their fee. The graphic below provides a list of questions you should ask to make sure the property manager is a good fit for your out-of-state rental.

  • How many rental units do you manage? Ideally, you want a manager who has between 200 and 600 rental units. This indicates that the management company has a solid enough client base to understand the local market but not so extensive that they won’t be able to handle managing yours.
  • What experience does your company owner have managing rentals? When the long-distance plumbing hits the fan you don’t want to be dealing with a company that’s never managed rentals. There is no college of rental property management, and you don’t want to have your rental managed by someone who’s still learning the ropes.
  • Are you actively investing in real estate in your market? If you are buying in a housing market you’ve never purchased in, you may want to have a property manager who understands the nuances of the local rental market. This is especially important intel when you’re dealing with an out-of-state investment property in a neighborhood that may be going through changes that only an experienced local investor would know about.
  • How do you collect rent? In order to track cash-flow of a rental property, you should be able to easily track payments. The best method is through an online payment system that gives you real-time information about any late payments. If you took out a mortgage to purchase the rental property, you want to know as early as possible if a tenant is going to miss rent, so you can move money to cover the mortgage payment.
  • What is your average vacancy time on rentals? The correct answer should be two to four weeks. An experienced property management company should have the marketing and rental pricing know-how to make sure your property is not vacant for more than a month. It’s bad enough having a rental vacant, but when it’s out-of-state, you want to know the company managing the property has a track record of getting renters quickly to minimize the expenses you incur when a rental is without a renter.On the other hand, a property manager that rents out your place in less than two weeks may be pricing it too low.
  • How do you handle maintenance and repairs? It’s not uncommon for a property manager to have “preferred” vendors to help with the inevitable issues that come up with maintaining and repairing a rental. You’ll want to get a list of these preferred providers and keep track of their expenses.Also be sure to put a cap on the cost of repairs that can be done without your authorization. You should trust the company to handle a $100 fee, but you may want to cap them on anything more than $200 so you can have a chance to see if you need a second opinion with a different vendor.

Track property tax trends in the neighborhood

Property taxes are a fixed expense you can’t get around paying, so be sure to track the last five years of property taxes to see what the average increase has been. If you’re seeing an acceleration in the tax rate, figure that into your return-on-investment analysis, so you don’t end up in a situation where your monthly expenses are more than the rent you’re taking in.

Make sure you understand the rental market in the area

Rental markets ebb and flow as new homes are built, new employers set up shop nearby or new schools are built in the area. A good property manager or experienced real estate agent should be able to give you a good idea of where the market is headed with a comparable rental analysis.

When you bought your first home, you may have gotten a comparable market analysis (CMA), which analyzes what homes are selling for in the area you’re thinking of buying. A comparable rental analysis looks at rentals nearby to give you an idea of what your monthly income is going to be.

If you finance the property with a mortgage, you’ll likely need a rental analysis form 1007, which is an additional report in a residential home appraisal that provides an opinion of the market rent for the home you’re buying. In some cases, the appraiser’s projected market rent can be used to help you qualify for the new mortgage, even if you don’t have a lease on the property you’re buying.

Special mortgage considerations for out-of-state rental property

If you’ve been buying investment property in your hometown, you already know financing a rental property comes with higher down payments and interest rates. There are a few more factors to consider.

Are transfer taxes due and who pays them?

Depending on what state you are buying property, transfer taxes may be charged for you to take ownership of the property you are buying. Unlike property taxes, these are a set lump sum percentage of your sales price, added to your closing costs.

Transfer taxes are often paid by the seller, but in some cases they may be payable when buying a home, adding to your total closing costs. It’s also good to at least know how much they are so they don’t end up being one of those hidden costs of selling a home. In places like New York City, that could mean an extra 1% to 2.625% of your sales price subtracted from your profit, in addition to real estate fees that usually run between 5% and 6%.

Are you buying in an attorney or escrow state?

Depending on where you purchase your rental property, you may need an attorney to handle your contract negotiations. That means higher costs than you’ll find in an escrow state, where an escrow offer can handle the signing usually at a much lower cost.

Are you buying in a community property state?

If you’re currently married or have a domestic partner, the community property laws could affect what happens to the property in the event of a divorce. Community property states require a split of equity down the middle, whereas the equity can be split up in negotiable amounts in a non-community-property state.

Final considerations

A little due diligence and research will help you avoid unpleasant surprises if you’re considering buying an out-of-state investment property. While many real estate companies offer “virtual tours” of homes, there’s nothing like an in-person tour to soak up the light, views, smells and feel of a home before you buy it.

If you can, budget enough time to take a trip to the state you’re considering buying in to inspect the top contenders before you start making offers on an out-of-state investment property.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Denny Ceizyk
Denny Ceizyk |

Denny Ceizyk is a writer at MagnifyMoney. You can email Denny here

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