Your debt-to-income (DTI) ratio is an important factor that lenders consider when you apply for a refinancing loan. DTI is the percentage of your gross monthly income that goes toward paying your debts, including your mortgage payment, credit card payments, car loans, and other debts.
Lenders use your DTI ratio to assess your ability to manage your debt and make your mortgage payments on time. The lower your DTI ratio, the better your chances of being approved for a refinancing loan, and the more favorable terms and interest rates you may receive.
To calculate your DTI ratio, add up all of your monthly debt payments and divide them by your gross monthly income. For example, if your total monthly debt payments are $1,500 and your gross monthly income is $5,000, your DTI ratio would be 30% ($1,500 divided by $5,000).
Lenders typically prefer borrowers to have a DTI ratio of 43% or lower, although some lenders may allow a higher DTI ratio if other factors, such as your credit score, are strong. Keep in mind that your DTI ratio is just one of several factors that lenders consider when you apply for a refinancing loan.
If your DTI ratio is high, you may want to consider paying down some of your debt or increasing your income before applying for a refinancing loan. Alternatively, you could explore other refinancing options, such as a cash-out refinancing, which allows you to borrow more than your current mortgage balance and use the extra funds to pay off high-interest debts or make home improvements. However, keep in mind that cash-out refinancing typically comes with higher interest rates and fees than a traditional refinancing loan.