Refinancing loans Tips: ratio of debt to income?

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What is a debt-to-income ratio?

Your debt to income ratio compares the amount of your debt (minus your mortgage payment) to your gross income. In most cases, the ratio is calculated on a monthly basis. For example, if your monthly gross income is $2,500 and you pay $500 per month in debt payment on loans and credit cards, your debt-to-income ratio is 20 percent ($500 divided by $2,500 = .20).

Debt-to-income ratio compares debt liabilities to income.

Debt-to Income Ratio = Total Debt Payments / Monthly Gross Income

How do I calculate my debt-to-income ratio?

The first step in calculating your debt-to-income ratio is figuring your gross monthly income, which is the amount you earn prior to all deductions. If you're paid every other week, multiply your take-home pay by 26, then divide by 12. This is your monthly take-home pay. If your income is inconsistent, estimate your monthly net pay by dividing the previous year's annual net pay by 12.

Remember to include:

· Income from alimony and child support can be counted as income

· Conservative averages of bonuses, commissions and tips

· Earnings from dividends and interest

Miscellaneous income such as government benefits and/or assistance. The 2nd step is figuring your total monthly debt payments. Add your present minimum monthly payments for all credit accounts and loans, excluding mortgage payments. Be sure to include:

Car payments

Loan payments (furniture, dept. store etc.)

Bank loans

student loans

Credit accounts

Credit card payments

Payment for medical collections

Divide your total monthly debt payment by your total monthly take-home income from all sources. The result will be your debt-to-income ratio.

Total monthly debt payments divided by monthly take-home pay equals your debt-to-income ratio percent.

Is my Debt-to-income ratio acceptable?

In most cases, reduce the debt / income, the better your financial situation. You are probably doing OK if the debt / income of 16-19 percent. Although every situation is different, a ratio of 20 percent or higher often signals the need to monitor your credit card. How can you remove the debt payments over time, you will pay less interest. Then you can save your money, invest or spend as you wish.

What is an acceptableDebt-to-income ratio?

Normally, the smaller your debt / income, the better your financial situation. A recommended ratio debt / income below 15 percent. A ratio of 20 percent or more signals to control credit and a plan to restore financial stability to start. Ideally, you will bear little or no debt so your income can be saved, invested or spent as desired, rather than used on interest payments.

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