Refinancing your mortgage is a great way to get rid of high interest credit card payments and even pull some cash out for home repair or a needed vacation. But just because you have equity in your home does not mean you can necessarily afford a new mortgage payment. So before you head to the local mortgage company and say, i want to refinance my mortgage do a few simple calculations and see what you can actually afford.

How Much Mortgage Can You Afford?

Mortgage lenders already have this one figured out for you and it is all in their lending guidelines. These guidelines are a set of pre determined parameters that the lenders feel help them accurately gauge a borrowers ability to pay the loan back.

The most critical of these guidelines is the ratio of you bills to your income. This ratio is called the debt to income ratio or DTI for short! Many lenders would prefer to see a DTI around 45%. But under some circumstances it can go as high as 50% and still be approved. Once it goes over 50% many lenders will deny the loan do to risk levels and the increased possibility of loan default.

Your Personal DTI is easily figured out by taking your monthly minimum credit account payments and dividing your gross pre tax monthly income into the amount. To keep it simple you can have roughly .45 cents of debt for every $1 you make in monthly income. So if you make $2000 you can have $900 in monthly debt payments.

Keep in mind that the debt to income ratio only takes into account things like credit cards, mortgage payments, car payments and other credit accounts. It does not take into account daily living expenses or luxury items like cable TV or cell phones so make sure to leave yourself money to live on after the house payment has been made.