What is Debt-to-Income Ratio?

Many people do not know that life insurance is a great way to lower your debt-to-income ratio. Let us take a look as to why that is.

What is the debt-to-income ratio?

What is the debt-to-income ratio? Debt to Income Ratio is the ratio that defines your net worth. Net Worth is the number that combines all your liquid and non-liquid assets. Then, it subtracts your debt. Your debt should be less than your assets. The reason for this is to prevent you from losing money. You should always have a positive net worth and should never, if at all possible, go negative. People who end up going negative on their ratio tend to declare bankruptcy or end up financially ruined.

How does the debt-to-income Ratio Work?

“For example, if you pay $1500 a month for your mortgage, another $100 a month for an auto loan, and $400 a month for the rest of your debts, your monthly debt payments are $2,000. ($1500 + $100 + $400 = $2,000.) If your gross monthly income is $6,000, your debt-to-income ratio is 33 percent. ($2,000 is 33% of $6,000.),states the Consumer Finance Protection Bureau.

How can this ratio affect me?

Banks look at your ratio to determine your financial ability to pay back any borrowed money. For example, if you need a $10,000 loan from a bank and own a life insurance policy but also have a 75% debt-to-income ratio, you likely will not be approved for that loan. You are considered a high-risk, so the bank will not take the chance on you.

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What is the 43% rule?

The 43% rule is a guideline for your debt-to-income ratio. When you have a higher ratio, it becomes significantly more difficult to get loans. If you have a higher debt-to-income ratio, you are more likely to be approved for loans. However, in the case of mortgages, you likely will not qualify for a qualified mortgage.

What is a Qualified Mortgage?

“A Qualified Mortgage is a category of loans that have certain, more stable features that help make it more likely that you’ll be able to afford your loan.states the Consumer Finance Protection Bureau. This instance is important because a non-qualified mortgage can devastate and cause significant financial strain to you and your family. Finances are the foundation of everything we do. The best way to concur with them is to understand them. Do research before taking out a loan, mortgage, or credit card. It’s better to know more about what you’re signing than not know what you just signed. When in doubt ask questions.

Life Insurance Questions?

We hope that this information on life insurance was useful to you.

If you’d like to learn how we can help you plan your retirement, call Empower Brokerage at (888) 539-1633 to speak to one of our Life and Annuity experts or leave a comment down below.

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This article was updated on 6/72024.

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