How Refinancing Can Help
Rebuild Your Credit Score |
By Nick Rian |
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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 perfect some 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 |
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