Notes On Debt And Income Ratio Essay
My friend asked me whether taking utility bills out of her name would help. I said “no”. My friend asked me if cancelling credit cards that she no longer used (with a zero balance) would help. I said “no”. My friend could not understand why or what her debt-to-income ratio had to do with refinancing her home. Here is what I wanted her to know.
Your Debt-to-Income Ratio Explained
Your debt-to-income ratio is a personal finance measure that compares your debt to your income. Your debt-to-income ratio is calculated by dividing your total monthly debts by your gross monthly income (given as a percentage). This is a general benchmark that is used together with other indicators to determine your creditworthiness (particularly when buying a house).
For example, let’s say my friend’s total recurring monthly debt was comprised of a $1,000 housing payment (mortgage, pmi, taxes), a $600 car payment, a $200 car payment, a $220 credit card payment, and a $350 student loan payment, for a grand total of a $2,370 monthly debt payment. Let’s also say her gross monthly income $4,000. This means her debt-to-income ratio would be 59% ($2,370/$4,000=0.5925). This is really high, and my friend would have a hard time getting a…