Refinance Loans and Your Current Credit

If you are thinking of a new purchase home loan or an appraisal-required refinance loan, one big part of getting ready for the commitment is measuring how current financial obligations stack up against the new monthly obligation of your home equity loan, cash out refinance, or new mortgage payment.

Do you see too much debt when you run the numbers? You may need to close down one or more open lines of credit to shrink what lenders call your debt-to-income ratio. Getting rid of your credit card debt is an important step towards lowering the debt-to-income ratio and refinance loan approval. What steps are recommended when trying to do this?

One important step is to see which line of revolving credit might be costing you the most due to high interest rates or big annual fees, or both--make it your goal to close that account first. Some people think that once the balance is paid in full that it’s “mission accomplished” for that card.

But there’s an extra step you should take; once that card has been paid off in full, consider canceling it in writing--mail the company a cancellation letter. It is advisable to send such notifications by registered mail, which requires confirmation of receipt. That can protect you in case of a dispute with the credit card company over your account being closed.

You should also prepare for your new refinance loan or home equity line of credit by monitoring your credit reports to make sure the most up-to-date information is reflected in those reports. Don’t allow outdated information on a now-closed line of credit to ruin your chances at a refinancing loan. You may have to wait a few weeks to several months for a credit report to update properly, so the time to work on cutting your debt-to-income ratio in this way is definitely sooner rather than later.

Another question to ask in this planning phase of your new refinance loan application--how does your current set of financial obligations look once the new monthly commitment of a home equity loan, cash out refinance has been added to the mix? Does the new loan seriously alter your debt to income ratio?

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