Too much credit, struggling credit payments, high debt to income ratio all affects a persons credit rating or FICO score. FICO stands for Fair Isaac Credit Organization and is a score reflecting a persons credit worthiness. When we talk about home equity refinancing, we usually talk about lower interest rates, tax deductions to save the homeowner cash and paying off the debt immediately to raise your credit score. Home mortgage interest is also tax deductible saving the homeowner extra cash every year. But people sometime forget a persons debt to income ratio also could negatively affect a FICO score. Even if you make the minimum monthly payment every month and your payment history is perfectsome banks could still shy away from loaning to you because of a low FICO score caused by debt to income ratio. US News and World Report shows the following guideline for debt to income ratio. 36% OR LESS: THIS IS A HEALTHY DEBT LOAD TO CARRY FOR MOST PEOPLE.37%-42%: NOT BAD, BUT START PARING DEBT NOW BEFORE YOU GET IN REAL TROUBLE.43%-49%: FINANCIAL DIFFICULTIES ARE PROBABLY IMMINENT.50% OR MORE: GET PROFESSIONAL HELP TO AGGRESSIVELY REDUCE DEBT.Obviously, refinancing a home and using the equity to pay-off credit card debt improves credit immediately. Mortgage lending expert, Dan Ambrose refers to these loans as band-aid loans. Banks allow a low set interest rate for two years allowing consumers to get their credit cleaned up, then the loan converts to a more traditional loan. Lenders usually charge higher interest rates for people with lower credit scores. Dan warns consumers to prepare themselves for when the loan converts. Home owners could face a higher interest rate than the original home loan, and their monthly payments could hit them harder. If consumers take the cash from their equity loan and pay-off their bills in full, after 18 months of perfect mortgage payments, Dan says the consumers credit improves to the point that now every bank will deal with them. |
