Knowing your debt-to-income ratio (DTI) is an important factor when refinancing. DTI is a measure of your total monthly debt payments divided by your gross monthly income. It is an important factor that lenders consider when evaluating your loan application because it helps them assess your ability to repay the loan.
To calculate your DTI, add up all your monthly debt payments, such as credit card payments, car loans, student loans, and any other loans or payments. Then, divide this total by your gross monthly income, which is your income before taxes and other deductions are taken out.
For example, if your monthly debt payments are $2,000 and your gross monthly income is $6,000, your DTI is 33% ($2,000/$6,000 x 100).
As a general rule of thumb, lenders prefer borrowers to have a DTI of 43% or lower, although some lenders may have stricter requirements. A lower DTI can improve your chances of getting approved for a refinancing loan and may also result in a better interest rate.
If you have a high DTI, there are steps you can take to improve it, such as paying off debt, increasing your income, or reducing your expenses. Improving your DTI can not only help you get approved for a refinancing loan but can also improve your overall financial health by reducing your debt burden.