If your home has increased in value and you’re sitting on a sizable amount of equity, you may think this is your golden ticket to do whatever you want. Home equity is the difference between what you owe the bank and the value of your property. As you pay down your home loan, and as your property appreciates in value, your equity increases. And with sufficient equity, you can borrow against your home and use the cash for a variety of purposes.

There are many uses for home equity. Some people get a home equity loan or a home equity line of credit and use the money to renovate or improve their property. This is a smart use for equity because home improvements and renovations can increase the value of your property, resulting in more equity.

A home equity loan or home equity line of credit is also useful for paying off high-interest credit card debt. The interest rate on a home equity loan or line of credit is often cheaper than the interest rate on a credit card, which means you can enjoy lower minimum payments and save money on interest. Additionally, borrowing from your equity is an option if you want to invest in your future, such as continuing your education or starting a business. But while it’s your equity and you can do pretty much anything you want with it, there are unwise uses for your equity.

When you borrow from your equity, you’re essentially borrowing from your net worth. These loans and lines of credit reduce the equity in your home. So while it’s tempting to borrow from your equity, there are times when you shouldn’t gamble with your home.

1.Don’t use your equity to buy luxuries

If you’re going to tap your home equity, make sure you’re not using your equity for luxuries. This can include buying high-ticket electronics, going on vacations or purchasing other unnecessary items. Understandably, it’s your money. But your home is one of your biggest assets. So if you’re going to take money from your equity, put it towards something that will improve your home, life or finances. For example, debt consolidation, a college education or home improvements.

2.Don’t get a home equity loan if you plan on selling the property

Think carefully about your future plans before getting a home equity loan or line of credit. If you know you’ll sell the house in the next couple of years, you’re better off waiting until you have a buyer for the property. You can get a home equity loan beforehand. Just know that once you sell the property, the proceeds from the sale must be enough to pay off your first mortgage and the second mortgage. Since a home equity loan and line of credit reduces your equity, you’ll have a smaller profit upon selling the property.

3.Don’t borrow too much from your equity

You might be able to borrow up to 80% of your equity, but it’s important that you only borrow what you need, and you should only borrow what you can afford. There are two reasons for this. For starters, a home equity loan creates a second lien on the property. And second, if you get a home equity loan that’s too expensive and you have difficulty affording the monthly payment, there’s the risk of default. If you default on a second mortgage, you can lose your prope

Some people are determined to live their American dream and they’re willing to do whatever it takes to purchase a bigger home. But unfortunately, some of these same people make the mistake of buying more house than they can afford, and they end up house poor.

Only you can decide the best time to upgrade to a bigger home and a bigger mortgage. The problem with upgrading is that we often don’t know what our new costs will be until after we’ve moved into a new place. Nonetheless, there are clues to help you decide the right time to move into a bigger mortgage.

1. You’re consistently saving money every month

One indication that you’re ready to upgrade to a bigger mortgage is having disposable income and consistently saving every month. You should never upgrade to a bigger mortgage at the expense of saving money. When you move into a bigger house, not only do you have to worry about a higher mortgage payment, but also higher utility costs and maintenance costs.

Closely examine your budget to see how much you’re currently bringing in and compare this with what you’re paying out every month. You should only upgrade if you’re currently able to pay your mortgage with no trouble, and if you have more income than expenses.

2. Upgrading doesn’t interfere with your ability to continue saving

But even if you currently have enough in your budget to upgrade to a bigger mortgage, make sure you don’t stretch your budget too thin and overextend yourself. People who are house poor typically spend all their money on their mortgage and they don’t have disposable cash to build a cash reserve or save for retirement. Although upgrading to a bigger mortgage may limit how much you’re able to save, it should never interfere with your ability to save.

3. You’ve paid off some of your debts

The more debt you have, the harder it will be to purchase a bigger home and afford a larger mortgage. You don’t have to be debt-free to buy a house, but if you’re looking to make an upgrade, you owe it to yourself to pay off as much of your consumer debt as possible. This not only increases purchasing power, it also makes it easier to manage higher housing costs.

4. You have plenty of equity

When considering upgrading to a bigger mortgage, consider how much equity you currently have. Your home is your biggest asset, and your equity can contribute significantly to your net worth. Equity is the difference between what you owe your mortgage lender and the value of your property. The more equity you have in your home, the more cash you’ll walk away with once you sell the property. Depending on your equity, you might be able to put a sizable down payment on another property. If so, you might upgrade to a larger home, yet receive a mortgage payment comparable to what you’re currently paying.

VA home loans are available to veterans, active duty military service members and qualifying spouses. This loan offers different repayment options like other types of mortgages, including 15, 20 and 30-year terms, plus the option of a five-year adjustable-rate mortgage. But even if you’re eligible for a VA home loan, there’s no rule that says you have to take advantage of this program. You might shop around and research other loans, such as a conventional loan or an FHA home loan. Every loan program has attractive features, but if you’re looking to save thousands on your mortgage, a VA home loan maintains the upper hand.

1. No money down option

A VA mortgage is one of the best programs around because these loans don’t require a down payment from borrowers, although you’re always free to give your lender cash toward the purchase. A down payment reduces the amount you need to finance and it can help you negotiate a better interest rate. Additionally, skipping a down payment can save you thousands of dollars when buying a home.

Take a conventional loan for example. If you were to purchase a $200,000 house with a conventional loan, you’re required to put down a minimum of 5%, which means you would need at least $10,000 for the purchase. An FHA home loan requires 3.5% down and you would need at least $7,000 for the same loan. Since there’s no down payment with a VA home loan, you can keep your cash reserve and put this money toward other uses, perhaps updating a home to your taste. And the fact that you don’t need a down payment means you can purchase a home sooner. This is an opportunity to take advantage of low mortgage rates and enjoy long-term savings.

2. Fewer closing costs

There are expenses with every mortgage, and while a VA home loan doesn’t require a down payment, you may have to dip into your wallet to cover your own closing costs. The good news is that getting a VA home loan saves money because the VA limits how much lenders can charge borrowers. Loan origination fees are typical with a mortgage. In the case of VA financing, your lender cannot charge more than a 1% origination fee, and they’re not allowed to charge you for certain costs, such as a brokerage fee, a prepayment penalty, processing fees, a pest and termite inspection, and attorney fees.

3. No private mortgage insurance

If you don’t mind paying a down payment and your primary concern is getting the lowest mortgage rate, after comparing loans you might find a conventional or FHA home loan with a cheaper rate than the one you were quoted for a VA home loan. However, before you decide to skip a VA loan and choose a different product, it’s important to remember that unless you put down a 20% down payment, you’ll have to pay mortgage insurance with both an FHA home loan and a conventional loan.

The VA doesn’t require mortgage insurance when borrowers purchase with no money down or less than 20% down. This insurance protects your lender in case of default. Annual premiums for private mortgage insurance with a conventional loan can be as much as 1% of the purchase price, and annual premiums are .85% of the purchase price with an FHA loan. Mortgage insurance can add $100-$200 to your mortgage payment every month, depending on your purchase price. If you can avoid this added expense, you can potentially save thousands every year.

FHA home loans, which are insured by the Federal Housing Administration, are an alternative to conventional financing and an attractive option for first-time home buyers, although anyone can apply.

These loans are sometimes easier to get than conventional loans, but this doesn’t mean everyone who applies for an FHA loan is approved for financing. Like any mortgage loan, there are minimum requirements, and your FHA loan may be rejected if you don’t fit the criteria.

1.You have a credit score below 620

One advantage of an FHA home loan is that the program only requires a minimum credit score between 500 and 580. This opens the door to homeownership if you’ve had credit problems in the past. But while it is possible to get an FHA loan with a credit score as low as 500, mortgage lenders that offer FHA products can set their own minimum credit score standard, and some lenders don’t approve applicants with scores lower than 620, regardless of a particular program’s minimum requirement.

The upside is that while one lender might reject your FHA home loan application, another lender might approve your loan. Before applying for a mortgage, check your credit report and credit score. If you have a credit score below 620 and you’re considering an FHA loan, speak with multiple lenders and ask about their minimum credit score requirement.

2. You don’t have a down payment

Although FHA home loans are insured by the government, this doesn’t mean you can purchase a home without a down payment. This loan isn’t like other government products that don’t require a down payment, such as VA home loans and USDA home loans.

FHA home loans require a minimum down payment of 3.5%. If you apply for a loan without enough in reserves for a down payment, the bank might reject your application. Your request for an FHA home loan might also be rejected if you don’t have enough reserves to pay closing costs, which can be as much as 2% to 5% of the sale price. Fortunately, FHA home loans allow sellers to pay up to 6% of a buyer’s closing costs.

3. Your debt-to-income ratio is too high

When determining whether you qualify for a mortgage loan, the lender calculates your debt to income ratio to make sure you’re not carrying too much consumer debt. You don’t have to be debt-free to get a mortgage, but if auto loan payments, personal loan payments and minimum credit card payments take a chunk of your income, this can reduce purchasing power and jeopardize a mortgage approval.

One advantage of an FHA loan is that the program allows for a higher debt ratio. With a conventional loan, your total monthly debt payments including the mortgage shouldn’t exceed 36% of your gross income. With an FHA home loan, your monthly debt payments including the mortgage can be as high as 43% of your gross income. This isn’t a hard or fast rule. So if your debt to income ratio is higher than 43%, the lender may still approve your application, but only if you’re well-qualified in other areas. This includes a credit score of at least 680 or higher, three month’s of mortgage payments in reserves or a history of on-time mortgage payments. Keep in mind, however, you’re not likely to get an FHA loan if debt payments are greater than 45% of your gross income.

Getting a mortgage can be intimidating, but you don’t have to go through the process alone. You’ll work closely with your loan officer who can answer your questions and explain each step. But although you’ll have the guidance of a loan officer, it’s important to conduct your own research before you meet with a lender.

Even if you don’t have immediate plans to purchase a home, it’s never too early to prepare for the buying experience. There’s a lot you may not know about mortgages. However, the more you know, the less surprises you’ll have during the application stage.

Here are five things you don’t (but should) know about getting a mortgage.

1. Lenders use the lowest of your three credit scores

You may already know that you have three credit scores, and you probably know that the lender will pull all three of your credit reports. What you may not know, however, is that many mortgage lenders use the lowest of your three credit scores to determine your interest rate. This isn’t a problem when all three of your credit scores are high. But if two of your credit scores are barely over 680 (which is considered a good score) and one credit score is at 660 (which is considered a fair score), the lender will base your rate on the lower score, which means you could pay a slightly higher mortgage rate.

2. It can take up to 45 days to close on a mortgage

Years ago, it wasn’t unusual to purchase a house and close on the mortgage within two to three weeks. It’s a much slower process today, and it can take on average between 30 and 45 days to close on a mortgage. You might close sooner, but only if the lender doesn’t have many closings ahead of yours.

3. There are ways to avoid private mortgage insurance

If you’ve educated yourself on home buying and mortgages, then you’re probably aware that conventional lenders require private mortgage insurance when a borrower puts down less than 20%. The good news is that there is a way to put down less and avoid private mortgage insurance.

Some banks offer piggyback financing where you make a 10% down payment and then receive a first mortgage for 80% of the purchase price and a second mortgage for 10% of the purchase price. With this type of financing, you’ll avoid the extra expense of private mortgage insurance, which has an annual premium as high as 1% of the loan balance. The downside is that piggyback financing requires 10% down, which is more than the minimum 5% down required for conventional financing.

4. You can refinance an underwater mortgage

If you owe more than your home’s worth, a mortgage lender might reject your application for refinancing. Some banks do not refinance upside down home loans. There are, however, lenders who offer refinancing through the Home Affordable Refinance Program (HARP) which allows refinances up to 125% of a home’s value. Because of this provision, underwater or upside down homeowners can take advantage of lower mortgage rates and lower monthly payments. To qualify for HARP, your mortgage must be guaranteed by Freddie Mac or Fannie Mae.

5. Cosigned debt can affect a mortgage approval

Some people don’t completely understand the consequences of cosigning a loan for another person. Since a cosigned debt appears on your credit report and you’re responsible for this debt if the primary signer stops paying, mortgage lenders have to factor in this monthly payment when determining how much you can afford to spend on a property. And unfortunately, a cosigned debt can affect your ability to get a mortgage, and reduce the amount you’re able to borrow.

Regardless of whether retirement is 10, 20 or 30 years off in the future, the earlier you start planning, the better off you’ll be financially. Planning can include enrolling in an employer’s 401(k) or opening an individual retirement account. And with regard to expenses, you may set a goal of paying off your mortgage before retiring.

Some may argue that rushing to pay off a mortgage before retirement isn’t the best idea. Keeping a mortgage means the ability to write off mortgage interest, which can reduce your taxable income now and once you retire. Rather than pay off a home, some also argue that it is better to contribute extra funds to a retirement account and build a bigger nest egg.

Only you can decide the best approach for your money. However, paying off your mortgage doesn’t interfere with retirement planning, eliminating this expense could be the smartest move to secure your future.

The truth of the matter is, your income is likely to decrease after you retire. If you bring a mortgage into retirement, the expense could be too much for your income, and you may have to downsize or sell the house to make ends meet.

If you want to remain in your house after retiring, make choices that’ll result in the least amount of expenses. Here are three ways to be mortgage-free before retiring.

1. Get a biweekly mortgage

With a biweekly mortgage, you pay one half of your mortgage payment every two weeks. This results in one extra mortgage payment a year. Although a simple move, this payment schedule reduces the amount of interest you pay and can decrease your mortgage term by up to seven years.

If you don’t want to commit to a biweekly schedule, choose a regular schedule and make extra principal payments. Additionally, if you purchase a house later in life and you don’t want a 30-year mortgage, review your budget to see whether you can afford a 15-year or a 20-year mortgage. You’ll not only pay off the mortgage balance sooner, a shorter terms helps you build equity faster.

2. Refinance your mortgage

If you’re adamant about paying off your mortgage before retiring, another option is refinancing the mortgage to take advantage of a lower interest rate and a lower monthly payment. But instead of refinancing for another 30 years, select a term that’s closest to the remaining term on the mortgage. So if you’re already 10 years into paying off the loan, refinance the mortgage for only 20 years to maintain the same pay off schedule. If you qualify for a lower interest rate, your mortgage payment will decrease. Rather than make the smaller payment, continue to pay the original mortgage amount, but apply extra funds to the principal only.

3. Don’t borrow from your equity

If you have substantial home equity, it can be tempting to get a second mortgage or a cash-out refinance. Just know that borrowing against your home’s equity increases your mortgage debt and reduces your home equity. The more second mortgages you receive, the longer it’ll take to pay off your house, and you’re more likely to carry mortgage debt into retirement.

Understanding mortgage interest is important when buying a house. But some borrowers don’t realize the impact interest rates have on financing. Getting an affordable mortgage isn’t only about the sale price of a home, it also has a lot to do with your interest rate.

Interest is the cost of borrowing money. A low rate can result in cheaper monthly payments and reduce how much you pay over the life of the loan. With regard to borrowing money, there are two costs you need to understand: interest and APR.

You may use these terms interchangeably, but there are slight differences. Interest is the cost of borrowing the principal, whereas the annual percentage rate (APR) is the annual cost of borrowing money and includes the interest rate and fees (broker fees, mortgage insurance and points, etc.)

Economic Factors That Influence Rates

Whether you’re shopping for your first mortgage or you’re a repeat buyer, you may already know that mortgage rates can fluctuate on a day by day basis.

Banks and other mortgage lenders originate home loans, but in most cases, these lenders do not keep loans in their portfolio. Instead, they sell all or a percentage of their loans to agencies such as Fannie Mae or Freddie Mac. These loans are then sold to investors.

Mortgage interest rates are determined by what investors are willing to pay on the secondary market. Lenders adjust their rates accordingly based on economic factors. Most banks keep their mortgage rates competitive to attract customers, although rates can vary slightly from lender to lender.

What Determines Your Individual Rate?

But although investors in the secondary market influence mortgage rates, different factors determine your individual rate. These include the size of your down payment, your mortgage term and your credit score. To put it plainly, your mortgage rate will be largely based on your risk level. If mortgage lenders view you as a low risk, you’ll receive a better rate.

Giving your lender a larger down payment—perhaps 10% or 20%—is one way to negotiate a better loan rate. The more you have at stake, the less likely you are to walk away from the mortgage. Likewise, you may qualify for a better mortgage rate if you have a high credit score. Borrowers with the highest scores are less likely to default and jeopardize their excellent credit rating.

Another factor that determines your rate is the mortgage term and the type of mortgage. Some lenders offer lower rates for 15-year and 20-year mortgages. You also have the option of a fixed-rate or an adjustable-rate. Fixed-rate mortgages feature a rate that doesn’t change, resulting in predictable payments. An adjustable-rate mortgage has a temporary fixed-rate period followed by annual rate adjustments.

With an ARM, the rate may be fixed for the first three, five or seven years, and then reset every year thereafter. These mortgages are attractive because they have lower rates during the initial years, allowing you to start off with a lower home loan payment. The main problem with an adjustable-rate mortgage is that your payment can go up as your interest rate increases.

The appraisal is a critical step in the home buying process. An appraisal is required by mortgage lenders and it estimates the value of a property. A mortgage lender will not lend more than a home’s worth, so the bank will order an appraisal from a licensed or certified home appraiser who’ll assess the property’s market value based on a number of factors, such as square footage, improvements and recent home sales. Sadly, some homebuyers and sellers don’t know how appraisals work, or understand how the appraisal can affect a real estate transaction.

Whether you’re a first-time buyer or a repeat buyer, here are four things you need to know about appraisal.

1. How An Appraisal Differs from a Home Inspection

Both a home inspection and a home appraisal are common practice when buying or selling a property, but there are differences between the two.

With a home inspection—which is optional—a certified home inspector conducts an in-depth examination of the property from top to bottom. He looks for potential defects or problems with the roof, foundation, electrical system, plumbing, and HVAC system. An appraisal, on the other hand, also visually inspects a home. But since his job is to determine the property’s market value, his attention is focused on the home’s size, improvements and overall condition. The appraiser then compares the property’s selling price with recent sale prices of similar homes in the area.

2. Who Pays for a Home Appraisal?

The home appraisal fee is part of a buyer’s closing costs. But instead of paying for the appraisal at closing, it’s usually paid beforehand at the time of the appraisal. Homebuyers are responsible for the fee. The cost of a home appraisal varies, but a typical fee is between $300 and $400

3. Who Selects the Home Appraiser?

A home appraisal needs to be neutral and non-biased; therefore, neither the home seller or buyer selects the appraisal company. The buyer’s mortgage lender chooses the appraiser who physically visits the property. The entire process can take as little as 20 minutes or an hour or more, depending on the size of the property. The appraiser will take note of the condition of the property and provide the bank with a written appraisal within two to five days.

4. What to Do With a Low Appraisal?

Sometimes, homes appraise lower than the agreed-upon sales price of a property. This doesn’t necessarily kill the deal. There are ways to respond to a low appraisal. As the seller, you can reduce the sale price of the house to match the appraisal. If the sale price is $160,000, but the home only appraises for $157,000, lowering the price by $3,000 might be enough to save the deal. You can ask for a copy of the appraisal report and look for errors. The report may include mistakes about your home’s square footage, number of bedrooms or recent upgrades. There’s also the option of getting a second opinion. Some lenders will allow a second appraisal, but the home seller must pay the expense.

After the housing collapse, some mortgage lenders started requiring a 10% down payment for home purchases. Unfortunately, this new requirement made it nearly impossible for many to buy a home. The good news is that low down payment mortgages have made a comeback, and if you’re looking to buy a home, you can qualify with as little as 3% to 5%.

This is an option when you don’t have a 20% down payment. Twenty percent of a $200,000 purchase is $40,000, which isn’t realistic for the average homebuyer. Several mortgages have low down payment options, including FHA loans, Fannie Mae’s HomeReady and Conventional 97, and a standard conventional. These programs let you purchase a property with the least amount of upfront cash. Although an attractive option, a low down payment isn’t the rule, nor does it make sense for everyone.

Benefits of a Traditional Down Payment

Understandably, many homebuyers want to spend as little of their own money as possible on a home purchase. And yes, giving the bank a lot cash at once can be scary. For this reason alone, you may lean toward a smaller down payment. However, if you recently sold a home and proceeds from the sale allow you to put down 20%, or if you have access to other resources, there are reasons to love the idea of a 20% down payment. You don’t have to pay private mortgage insurance with a 20% down payment and you’re able to negotiate a lower mortgage rate. In addition, you’ll borrow less, pay less interest and enjoy instant equity.

Importance of a Cash Reserve

But even if you have funds for a 20% down payment, you shouldn’t give the bank all of your money. Cash reserve requirements vary by lender. Some banks require borrowers to maintain a cash reserve equivalent to one or two month’s mortgage payments. Your lender may not have this specific requirement, but as a rule of thumb, only give the bank a 20% down payment if you’re able to maintain some cash in your personal account.

Some homebuyers make the mistake of cleaning out their savings to buy a home, and they have nothing leftover for an emergency, home repair or other unexpected expenses. Given the number of low down payment options, there’s no reason to wipe out your cash reserve. Rather than a 20% down payment, maybe give the lender a 10% or 15% down payment and keep the remaining cash for a rainy day.

A pre-approval letter is your biggest bargaining chip when shopping for a home. Getting pre-approved isn’t a requirement. But when you include a pre-approval letter with a home offer, it says you’re a serious buyer and you’ll get the seller’s attention.

 A pre-approval means you’ve submitted an official mortgage application and provided the lender with financial documentation, such as your most recent bank statements, pay stubs, w-2s and tax returns. You also give the lender permission to check your credit.

 Your pre-approval letter, however, is more than a letter saying you qualify for a home loan. It also includes information that you, your realtor and home sellers need to know.

1. Type of mortgage

 There are numerous home loan products, and as the borrower, you need to know the type of mortgage you’re approved for. Your pre-approval letter will indicate your mortgage program, such as FHA, conventional, USDA or VA home loan. This is important because different mortgages have different down payment requirements and minimum credit score requirements, plus your type of mortgage determines how much a seller can contribute to your closing costs. If you have a conventional loan, the seller can contribute up to 3%, whereas FHA loans allow sellers to contribute up to 6%.

 Your pre-approval letter also includes information about your mortgage term—10, 15, 20 or 30-years.

2. Mortgage rate

 A pre-approval letter will also include your mortgage rate. Understand that mortgage rates can fluctuate up or down on a day-to-day basis. So the rate you’re quoted at the time of applying for the mortgage might be different from the rate you receive at closing. To avoid a possible rate increase, the bank may offer a rate lock option. For a fee, you can lock your rate for a certain length of time—typically up to 45 or 60 days.

3. Mortgage conditions

 Your pre-approval letter may be subject to certain conditions. For example, the lender may include a condition that says the mortgage is contingent on your ability to sell your current home. This might be the case if you don’t have resources to carry two mortgage loans. Additionally, the mortgage will be contingent on a home appraisal. A mortgage lender isn’t going to give you $200,000 to purchase a house if the appraisal report says the property is only worth $180,000.

5. Pre-approval date

 Since a mortgage pre-approval usually expires within 90 days, your letter will include an issue date and an expiration date. If you’re unable to find a property within this time frame, the lender will take a second look at your credit and finances before issuing another pre-approval letter.