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DTI for cash out refinance


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I’m hoping to do a cash out refinance to get a lower interest rate and consolidate a higher interest rate personal loan.

 

Do lenders look at your current DTI? Or your future DTI with the refinance, using your new house payment and NOT including the personal loan, which would be paid off during the refinance?

Edited by Frankiefan88
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  • Frankiefan88 changed the title to DTI for cash out refinance

23 hours ago, Frankiefan88 said:

I’m hoping to do a cash out refinance to get a lower interest rate and consolidate a higher interest rate personal loan.

 

Do lenders look at your current DTI? Or your future DTI with the refinance, using your new house payment and NOT including the personal loan, which would be paid off during the refinance?

 

DTI for qualification for the new mortgage will include all of the debt payments that you are required to make at that time.

 

Ask your mortgage company if they'll exclude the personal loan payments from your DTI if the full balance of the personal loan is repaid directly from the proceeds of your refi (title company pays the loan company directly and you never take possession of the money.

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In my experience, I had a lender who did exactly what @cv91915 suggests:  a portion of my debt was scheduled to be paid at settlement (out of my own funds, in this case ... it was my first mortgage) and the lender was permitted to exclude the debt from by DTI calculation.

 

As an added note, any installment debt for which installment payments terminate within something like 6 mo (not sure of the period) can also be excluded from DTI.

 

FWIW, where it's desirable to roll personal debt into a secured loan, my personal strong preference is to open a HELOC and use that as the refi vehicle.  I might recommend this strategy in your shoes, even if you intend to go forward with the mortgage refi for the sake of a lower rate.

 

Once you bury a debt into a term mortgage, the debt basically becomes lost and is a permanent impairment against you equity in your home.  While it's true that you can up your mortgage payments to compensate, or perhaps refi into a shorter term so as to effectively repay the personal loan through higher payments, my guess is that for most who roll debt into their mortgage, inertia ensures that equity is sucked and nothing else compensates.

 

A low rate HELOC has all the attractiveness of a low rate conventional mortgage, but sticks out like a sore thumb as always having the option to accelerate payoff.  I've never taken a HELOC with the intent to finance debt over the 30 years permitted.  I use it principally for hard goods (furniture/appliances) and home improvements and set an amortization schedule that will pay any new debt down within 3 - 7 years.  As a consequence, draws against my equity are always medium term ... and home improvements ultimately manifest themselves in true added home equity once paid off.

 

Of course, I don't know your circumstances or viable options.  Bottom line, you gotta do what makes most sense :) .

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