ELFI wishes for the safety of all individuals in areas impacted by the natural disasters in the United States. If you've been affected, assistance may be available to you. Contact your loan servicer for more information.
AES: 1-866-763-6349 | MOHELA: 855-282-4269
×
TAGS
Personal Finance

The Importance of a Good Debt to Income (DTI) Ratio

November 15, 2019

It is evident to most people that having more income and less debt is good for their finances. If you have too much debt compared to income, any shock to your income level could mean you end up with unsustainable levels of debt. Every month you have money coming in (your salary plus additional income) and money going out (your expenses). Your expenses include your recurring bills for electricity, your cell phone, the internet, etc. There are also regular amounts that you spend on necessities, such as groceries or transportation. On top of all of this, there’s the money you spend to service any debts that you may have. These debts could include your mortgage, rent, car loan, and any student loans, personal loans, or credit card debt.

 

What is the Debt-to-Income Ratio (DTI)?

The Debt-to-Income Ratio (DTI) lets you see how your total monthly debt relates to your gross monthly income. Your gross monthly income is your total income from all sources before taxes and other deductions are taken out. Below is the formula for calculating your DTI:

DTI = (Total of your monthly debt payments/your gross monthly income) x 100

 

Example: Let’s suppose the following. Your gross monthly income is $5,000, and you pay $1,500 a month to cover your mortgage, plus $350 a month for your student loans, and you have no other debt. Your total monthly payments to cover your debts amounts to $1,850.

 

Your DTI is (1,850/5,000) x 100 = 37%

Here’s a handy calculator to work out your DTI.

 

Why is Your DTI Important?

Your DTI is an important number to keep an eye on because it tells you whether your financial situation is good or if it is precarious. If your DTI is high, 60% for example, any blow to your income will leave you struggling to pay down your debt. If you are hit with some unexpected expenses (e.g., medical bills or your car needs expensive repairs), it will be harder for you to keep on top of your debt payments than if your DTI was only 25%.

 

DTI and Your Credit Risk

DTI is typically used within the lending industry. If you apply for a loan, a lender will look at your DTI as an important measure of risk. If you have a high DTI, you will be regarded as more likely to default on a loan. If you apply for a mortgage, your DTI will be calculated as part of the underwriting process. Usually, 43% is the highest DTI you can have and likely receive a Qualified Mortgage. (A Qualified Mortgage is a preferred type of mortgage because it comes with more protections for the borrower, e.g., limits on fees.)

 

So, What is a Good DTI?

If 43% is the top level DTI necessary to obtain a Qualified Mortgage, what is a “good” DTI? According to NerdWallet, a DTI of 20% or below is low. A DTI of 40% or more is an indication of financial stress. So, a good rule of thumb is that a good DTI should be between these two figures, and the lower, the better. 

 

The DTI Bottom Line

Your DTI is an essential measure of your financial security. The higher the number, the less likely it is that you’ll be unable to pay down your debt. If there are months when it seems that all your money is going toward debt payments, then your DTI is probably too high. With a low DTI, you will be able to weather any financial storms and maybe even take some risks. For example, if you want to take a job in a field you’ve always dreamed about but are hesitating because it pays less, it will be easier to adjust to a lower income. Plus, debt equals stress. The higher your DTI, the more you can begin to feel that you’re working just to pay off your creditors, and no one wants that.

 

DTI and Student Loan Refinancing

Your DTI is one of several factors that lenders look at if you apply to refinance your student loans. They may also assess your credit history, employment record, and savings. Refinancing your student loans may actually decrease your DTI by lowering your monthly student loan payment. This may help you, for example, if you want to apply for a mortgage. ELFI can help you figure out what your DTI is and if you are a good candidate for student loan refinancing. Give us a call today at 1.844.601.ELFI.

 

Learn More About Student Loan Refinancing

 

Terms and conditions apply. Subject to credit approval.

 

NOTICE: Third Party Web Sites

Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – The bank is not responsible for the content. Please contact us with any concerns or comments.

Leave a Reply

Your email address will not be published. Required fields are marked *

Happy couple admiring their home
2020-10-22
Should I Build Home Equity or Pay Down Student Loans?

Owning a home is a goal for many people. In fact, 40% of young millennials are saving to buy a home. If you already own a home, congratulations on achieving your goal! If you are now faced with a mortgage and student loans, you may wonder which debt you should prioritize. Should you build home equity or pay down your student loans?    Here we will explain what home equity is, how to build it and when it’s better to focus on home equity or paying down student loans.   

What is Home Equity?

When you pay on a mortgage, even if you haven’t yet paid it off completely, you’re building equity in your home. Home equity is the difference between the market value of the house and what you owe. Here’s an example of how to calculate it:  

How to Calculate Home Equity

  You can calculate your home equity by subtracting the balance of your mortgage from the current value of your home. The value of your home is determined by the fair market value of your house or the appraised value. This number is the true value of your asset (your house) since it takes into account the amount you owe on the loan.    Your home equity is calculated in your net worth. You may have heard that home equity can be “tapped into.” This means you can borrow against the equity of your home and use the money in a variety of ways. A home equity loan can cover home renovations or pay off higher-interest debt.    Your home is valued at $375,000 and your mortgage balance is $275,000. You determine the equity by taking the value of $375,000 and subtracting the mortgage balance of $275,000. The equity in your home is $100,000.   

Home Equity and the Housing Market

  Your home’s equity often increases when you make mortgage payments, especially when paying down the principal on your loan. Your home’s equity can also increase when its value rises. Although the value is determined primarily by the housing market, you can raise the value through home improvements.   Just as the value of your home can increase based on the market, however, it can also decrease based on the market. The only sure way to increase your home equity is by paying down your mortgage loan. The more of the loan you pay off, the more your equity increases.  

Building Home Equity vs. Paying Down Student Loans

  If you follow the normal payment schedule, you’ll increase your home equity slowly. If you make extra payments towards your mortgage, you can build equity faster. However, if you also have student loans, should you build home equity or pay down your student loans instead? Let’s take a look at some factors that can help determine the best course of action:   

Interest Rates

If either your mortgage or any student loan has a variable interest rate, you may want to focus on that loan first, because you are at risk that the rate can rise and leave you with a higher payment to make. In addition, if one of your loans has a much higher interest rate than the other, you may choose to focus on it first.  

Security

With student loans, in certain instances, if you are facing financial hardships you can temporarily suspend payments. Mortgages offer less flexibility with payments, therefore missing payments can result in foreclosure and losing your home.  

Loan Balances

If you have student loans with lower balances than your mortgage, you may be able to pay them off more quickly. Then, you can continue to build equity after paying down your student loan debt.   

Tax Implications

You may get a bigger tax break by building equity versus paying off student loans. However, this doesn’t apply to everyone. Interest paid on student loans is deductible, however, there is a cap on how much. As of 2020 the cap is $2,500. Your income must meet the requirements to be able to deduct this amount.    Interest paid on mortgages is also deductible, but only if you itemize your deductions. The mortgage interest deduction can be much higher than $2,500. To learn more about either of these options, consult with your tax advisor.  

Refinancing Your Student Loans With ELFI

If you don’t want to choose between building equity or paying off your student loans, then consider refinancing your student loans with ELFI. Use our student loan refinance calculator* to see how much you may be able to save.   

The Bottom Line 

Each person’s financial goals and situation are unique, so you have to make the best decision for you. Hopefully, however, knowing more about both options and which is better in certain circumstances will help you make an informed decision.  
  Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no­­­ control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.   *Subject to credit approval. Terms and conditions apply.
Man feeling overwhelmed by student loans
2020-10-15
What to do When Your Student Loan Payment is Overwhelming   

Having student loans is not unusual. In fact, 45 million people have them. It’s also incredibly common to feel overwhelmed by your student loan payments.   A survey of student loan borrowers found that almost 65% of respondents said they lose sleep because of the stress caused by their loans. If you find yourself overwhelmed by your monthly student loan payment, there are some options you should consider to lessen the burden.   Before you can explore alternatives, however, you need to know the types of loans you have. Certain options are only available for federal loans as opposed to private loans. Check the Federal Student Aid website to determine any federal loans you may have, and request your free credit report to see any private loans. Once you’re familiar with your loans, you can consider new courses of action.  

Create a Budget

If you don’t already have a budget, create one! This will allow you to see if you can afford your current student loan payment. It will also show you areas where you’re spending unnecessarily. If you find there just isn’t enough income to cover all your necessary expenses, then you can begin working on different ways to reduce your student loan payment.  

Research Different Payment Plans

If your federal student loan payment is overwhelming, consider switching to a different payment plan. When you initially begin repayment, your loans are automatically put on the standard repayment plan. On this plan, your payments are based on a ten-year repayment term.   A Direct Consolidation Loan can help you change your payment plan to help make your payment more affordable. It can also help consolidate multiple federal loans into one loan. (Note: Consolidating your federal loans is different from student loan refinancing, discussed below.)   This will help you qualify for certain longer repayment plans, resulting in a lower monthly payment. One of the drawbacks of extending your payment term is you will end up paying more in interest costs over time.  

Income-Driven Student Loan Repayment

Certain loans are eligible for income-driven repayment plans. They can help make your payments more affordable and are based on your income and family size.  

Graduated Student Loan Repayment

If an income-driven repayment plan does not work for you, you can change to a graduated repayment plan. Your payment will begin low and increase over time for a ten-year term.  

Extended Student Loan Repayment

Another option is an extended repayment plan. To qualify, you must have certain loans over at least $30,000. Your payment may be fixed or may increase over time for a 25-year term.  

Look Into Refinancing

If you have overwhelming private or federal student loan payments, consider student loan refinancing. Refinancing may lower your interest rate and reduce your monthly payment. This is a good option even if your current payment fits your budget.   Refinancing can help lower your monthly payment, and can also save you thousands of dollars in interest over the life of the loan. Refinancing means obtaining a private loan to pay off your existing student loan or multiple loans.   Student loan refinancing differs from consolidation, which is only for federal student loans and may not necessarily reduce your interest rate. You can refinance private or federal loans, or both, and can also change your student loan repayment term to better fit your needs.   Here is an example of how refinancing can save you money:   If you have $65,000 of student loans with a 6% interest rate and have 10 years remaining on your loans, you will pay approximately $722 per month. If you refinance and qualify for a lower interest of 3.61%, your monthly payment would be reduced to approximately $646 per month. This equals savings $76 per month in savings. You will also save more than $9,000 in interest over the life of the loan.   To see how much you could save, try ELFI’s Student Loan Refinance Calculator.*  

Increase Your Income

Of course, increasing your income is easier said than done. If your student loans payments are becoming overwhelming, however, it may be a necessary step. Increasing your income through overtime hours or a side hustle can make your payments more manageable. A side hustle can be as easy as babysitting or dog walking, or more involved like starting a side business based on a passion.   If you haven’t begun repayment on your loans, but know you will face a significant loan payment after graduation, consider these steps:  

Build a Budget Early

Start a budget before repayment begins that includes your future student loan payment. This will allow you to see if you will be able to comfortably afford your payment. It will also help you build an emergency fund and a strong financial foundation.  

Seek Employer Student Loan Benefits

Look for an employer that offers student loan assistance. The number of companies that are offering student loan benefits is increasing, although the benefit is still rare. Some offer monthly benefits that can help you pay your loans off faster. Others offer a yearly benefit amount for a certain number of years. Either way, extra money from an employer to help pay loans will help you reduce your loan amount faster.  

Work Toward Public Service Loan Forgiveness

Apply for employment that may qualify for forgiveness. If you have federal loans, certain employment can qualify for forgiveness under the Public Service Loan Forgiveness program. Certain loans and types of employment are required so be sure to pay close attention to the requirements.  

Bottom Line

If you have an overwhelming student loan payment, explore your options to reduce your payment while furthering your debt-free journey.  
  *Subject to credit approval. Terms and conditions apply.   Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no­­­ control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.
Millennial woman learning how to invest
2020-10-09
How to Start Investing: A Millennial’s Guide

One of the best things you can do for your finances is start investing. Over time, investing is one of the likeliest ways you’ll build enough wealth to reach your financial goals — and even achieve financial independence.   While investing can seem like a daunting task, the good news is that it’s easier than ever to get started. Here’s what you need to know about how to start investing.  

Decide how much you can invest

Figure out how much you can invest each month. The key to long-term investing success is consistency. Even if it’s a small amount, you can start investing.  
Look at your income and expenses. Review which items can be reduced to create some room for investing. Even if you can only invest a few dollars per week, it will help you get started.  

Paying down debt vs. investing

One of the big issues facing millennials is whether to pay down debt or invest. In the end, it depends on your preference, but having debt doesn’t mean you can’t invest. For example, if you have student loans, you might put 70% of your available money toward paying down those student loans and the other 30% toward investing. However, if you have high-interest debt like credit cards, it might make sense to put 90% toward debt reduction and 10% toward investing.   Depending on your situation, you might want to tweak where you put the money, but you don’t have to let being in debt stop you from investing if you want to start building wealth.  

Know your goals

Next, decide on your goals. What do you want your money to accomplish on your behalf? What you plan to use your money for, as well as your timeline, can determine how you invest your money.
  • Short-term goals: If you want to save for a down payment on a house, a vacation or a similar goal in the next one to three years, consider putting your money in high-yield savings vehicles, or, depending on your situation and risk tolerance, bond investments. Even for short-term goals, in some instances, a mix of stocks and bonds can work.
  • Long-term goals: For longer-term goals like saving for a child’s college education or your retirement, you might decide to invest more heavily in stock funds, real estate investment trusts (REITs) and other higher-yielding assets.
 

Your risk tolerance

As you learn to start investing, make sure you understand risk tolerance. You need to be familiar with how much risk you’re prepared to take on. For example, if you’re relatively young, you have more time to withstand and recover from market downturns, economic problems and investing mistakes.   You should also consider your emotional risk tolerance. Even if, financially, you can handle the ups and downs of the market, you must be able to handle them emotionally, as well. If you struggle with the idea of using a stock index ETF to meet your short-term goals, then look for something that better suits your needs.  

Get help to learn how to start investing

There’s nothing wrong with asking for guidance as you learn a new skill. A number of online investment brokers can offer you professional help as you make your plans. Betterment, Wealthfront and Wealthsimple can help you build a portfolio that matches your risk tolerance and goals. Additionally, it’s possible to get help from human advisors as you create a portfolio.  

Basic tips to help you start investing

Start ASAP

It’s all about compounding returns, so the earlier you start, the better off you’ll be in the long run. Many investing experts talk about “time in the market instead of timing the market.” For many investors, starting early and being consistent about investing, while increasing contributions over time, is most likely to result in long-term success.   You can start investing at any time. If you haven’t started already, begin now. It’s relatively easy to open an account and begin investing.  

It’s fine to start small

You don’t need a lot of money to start investing. In fact, there are a number of apps that allow you to invest using pocket change. Check out our recommendations for the best investing apps here.   It’s true that investing a few dollars each week isn’t likely to fully fund your retirement or other financial goals. However, starting small gets you in the habit of investing and growing your wealth.   As your finances improve, you can increase how much you invest, growing your contributions to meet your goals. But, for now, start with whatever amount you can. The money you do invest in will grow over time, and you can keep adding to your portfolio in the future.  

Consider index mutual funds and ETFs

When trying to decide what to invest in, some people are overwhelmed by the prospect of sifting through individual stocks and trying to pick “winners.” For many beginners, it makes more sense to focus on vehicles that offer “instant diversity.”   Index investments offer exposure to hundreds — or even thousands — of securities at once. Rather than trying to choose individual stocks, you can get access to a wide swath of the market. If you decide later that you want to invest differently, you can change your portfolio makeup. For beginners, however, index investments offer a way to start building wealth while you research other choices.  

Learn the basics

Finally, make sure you learn the basics. Read about how investing works, how different assets perform and when they might be appropriate. While you can start small with index investments, use that time to learn when (or if) it’s time to try other investing strategies.   In the end, no one knows your situation as well as you do. Before investing, carefully consider your own situation and consider requesting help from an investing professional.  
  Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.