Debt to income (DTI) ratio is a tool used by mortgage lenders to estimate the amount that a borrower can afford to pay. You can easily calculate your DTI at home or online before you fill out a mortgage application. Your debt to income ratio usually reflects your gross income which is your earnings before taxes. Also, debt to income ratio only includes fixed monthly payments that would appear on a credit report. The lower your DTI, the better off you are in the eyes of the lender. There are two types of debt ratios to consider:
Knowing your DTI can be very helpful, in fact, it may be just as useful as knowing your credit score when it comes to applying for a home loan. Comparing your expenses and monthly financial obligations with your earnings can give you and the lender a clear cut picture of what you can afford to borrow. The lenders want to see low debt to income ratios, as studies have shown that the lower the DTI, the less trouble borrowers had with paying back their mortgages. There are two ways to lower your DTI, by increasing gross monthly income and/or decreasing monthly debt.
There are many costs included when calculating your DTI, including:
There are some risks involved when taking out an adjustable rate mortgage. Fixed rate loans are usually safer investments in comparison, especially when interest rates are low. The payments on an adjustable rate mortgage can change dramatically over just a few years. If rates go up fast, a 3.5% ARM could easily jump to a 6% loan in 4 years.
If you play your cards right, the first adjustment will usually be the worst, since caps on annual payments won’t apply. ARM’s can be confusing, especially since lenders can choose their own indexes, caps and margins. Despite the risks, there are several advantages to adjustable rate mortgage loans.
The fully indexed rate is the rate by which your payment amount is determined. This number is derived from a mortgage loan’s index and margin added together. The United States Treasury and similar bodies help form a common index. When you apply for a mortgage, you may negotiate your margin rate with the lender.