Debt To Income Ratio Plays An Important Role In Home Equity Loans

When you have a lot of debt against your name and are desperately groping in the dark to find out ways to pay them back, you may want to take up some other loan or borrow from a credit union. It is required to understand the debt to income ratio when you want to take home equity loan as it plays a very important role. You can be knowledgeable and more informed about your eligibility for a loan, be it home equity loan or cash-out refinance. It tells you all about the financial health as it clearly depicts the amount you earn and the amount you owe.

Important For Lenders

As it is important for you to keep you informed about the financial status, debt to income ratio or DTI is also a very important tool for the lenders as well. It gives them an idea of how much you could afford to take a loan by considering your ability to pay it back each month along with interest. It helps them to make an informed decision about how much to lend and at what rate of interest, how much should the monthly repayment be so that you do not have to face any problem arranging for money to meet the monthly bills.

Empower Yourself With It

When you know about your debt to income ratio, you can empower yourself to obtain the home equity loan. Now you should know the ways in which such an important tool is calculated. It is a very straightforward approach to the calculation of the DTI in which all your existing debts are taken into account along with the monthly payments for all. The projected payment of the new loan that you intend to take is added to it and then the percentage of all such payments is determined comparing with your total pre-tax income.

Components Of The DTI

The debt to income ratio considers your expenses, especially those which are related to debts. The debts that are usually included are credit card and car loan debts, student loans and all other existing debts, current mortgage along with taxes, payment to HOA and insurance and much more. It does not include a few expenses that you have to pay every month like your grocery bills and other living expenses along with all the monthly service bills like your cable TV package, cell phone and internet expenses. Apart from that, the essential expenses for utilities like gas, water, and electricity are also excluded.

The Ideal DTI

The ideal DTI would be 43% or lower for a home equity loan. This would give an idea of what percentage of the money you would have on hand to make the payments every month for all the existing debts along with the new one you intend to take. If it is higher, then it is better to reduce it first and then take a home equity loan otherwise you night have to take credit card help in addition to the loan, if you get that is, to get rid of the other existing debts.