If you are a homeowner carrying a large amount of debt, you may have thought about refinancing your mortgage. By doing so, you’re basically getting a restart as you’ll receive a new mortgage with new monthly payments and rates.
You’ll also save money.
Let’s say you have a 30-year fixed-rate mortgage loan at $165,000. By refinancing with a 6 percent interest rate to 5 percent, you could save more than $100 each month. Multiply this by 12 and you’ll have $1,200 in annual savings.
It sounds great, but you may have a high debt-to-income ratio and find it challenging to refinance at a lower rate as a majority of lenders will find your monthly debt obligations, including this new mortgage payment, greater than 28 percent for this important ratio. This could be too high for them.
However, if you are carrying high debt, don’t panic as there are a few things you can do to overcome this.
Calculate your debt-to-income ratio
Hopefully you have already done this but do you know your current debt-to-income ratio? If not, find out this number immediately.
This is calculated by taking your total your monthly debt obligations (such as the minimum payments on your credit cards, mortgage loan and other loans). Then take your monthly gross income and divide your monthly debt into it.
You’ll get a percentage number (the lower the number, the better), which you’ll need to share with your mortgage lender.
In addition to the current mortgage lender that you use, reach out to additional ones and tell them about your interest to refinance your existing mortgage with one carrying a lower rate. Be transparent, informing them about your high debt-to-income ratio and ask if they’ll be willing to work with you in spite of this.
Show you’re paying down debt
Along with your debt-to-income ratio (which you can’t hide), also show potential lenders that you’re paying down your debt. Gather your financial documents including your most recent credit card statements, federal income tax return, last few paychecks, bank statements and loan statements. Make copies of these documents and present them to the lender as evidence of your efforts to reduce your monthly debt obligations.
This may spur some to work with you and help refinance your mortgage. In addition, if you’ve recently had a salary increase, this will enable you to spend additional money monthly to cut down your debt. Don’t forget to include this information when talking to lenders and be sure to also bring some recent pay stubs along to confirm this salary change.
Also, if the lender says he’ll work with you amid your challenging debt-to-income ratio, be sure to also fill out a Uniform Residential Loan Application. This will kick off the process of refinancing.
After the loan application, be sure to sign any closing papers that are part of the refinance process. Keep in mind you’ll also incur refinance costs. You don’t necessarily have to pay them on the spot but you should be able to either include them into your new monthly payments or pay them through a lump sum at closing.
After you’ve put together you’re current financial picture and started speaking with various lenders for refinancing, remember to be patient. As someone carrying a high debt, it may take a while find a lender to work with you. You may become frustrated but continue reducing your debt-to-income ratio and think about pursuing refinancing when this number has improved.
When the time is right, it will happen.
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