One of the popular ways to lower debt is by refinancing. It’s possible to decrease your debt-to-income ratio by combining a high rate debt with a low rate mortgage loan. However, make sure this option fits your financial situation.
Monthly Debt-To-Income Ratio
The lender will check your total monthly debt, as part of making sure you qualify for the loan. This will include: a car or student loan along with card cards, child support and alimony. Then, the mortgage PITI (principal, interest, taxes and insurance), homeowner association fees and private mortgage insurance are added to get the total monthly debt.
Next, your monthly pre-tax income is divided by your debt to find the percentage of income used for debt. This is your debt-to-income ratio. Typically lenders prefer a maximum 36% ratio. If yours is higher, you might refinance for a smaller loan. Discuss with your lender how to reduce your debt.
Once you realize what your financial situation is, you’ll be able to work on a debt reduction strategy.
How Does Refinancing Affect Debt-To-Income Ratio?
The monthly debt-to-income ratio may decrease, if refinancing provides a lower payment. By lengthening the lifespan of your loan or by obtaining a lower interest rate, you can lower your monthly mortgage payment. Alternatively, if you’re switching to a fixed rate loan this could raise your total interest cost.
Reducing Monthly Debt
Once you’re aware of how your debt is spent, you can control it, save on interest and eventually reduce your debt-to-income ratio. You can use this strategy to start:
- Write down every credit card and loan from the highest to lowest interest rate. Note how much interest you’re paying on each one.
- Take a look at the debt with the highest interest rate and work out a long-term strategy to bring down its balance. Don’t compromise your economic goals or savings. Design a budget that you’ll follow by closely looking at your spending habits.
- Ask the credit card company to reduce your rate. If it’s reduced you’ll save a lot on interest and if not, you can still find out what it takes to qualify for an interest reduction.
Reducing your debt makes you look more credit worthy to your lender.
