I. Loan to Value Ratio (LTV)
Your loan to value ratio is determined by dividing the amount of the mortgage you are requesting by the appraised value of your home. Suppose you are borrowing 100,000 to refinance your home appraised at $175,000; your loan to value ratio (LTV) in this case ($100,000 / $175,000 x 100) is 57%. The lower your loan to value ratio, the better your mortgage interest rate will be. If your LTV is above 80% you will have a harder time qualifying and will pay a higher mortgage interest rate.
II. Yield Spread Premium (YSP)
Yield Spread Premium is the number one culprit when it comes to homeowners overpaying for their mortgage loans. This hidden markup of your mortgage interest rate results in spending thousands of dollars unnecessarily. Your mortgage interest rate is marked up by the person originating your loan because the wholesale lender pays them a bonus of 1% of your loan amount for every quarter percent they get you to pay over the interest rate you were approved. Fortunately, there are ways to recognize and avoid Yield Spread Premium when mortgage refinancing. To learn more about avoiding this unnecessary markup of your mortgage interest rate, register for the free video tutorial available on this site.
III. Debt to Income Ratio (DIR)
Your debt to income ratio is important factor in determining the mortgage interest rate you will qualify. To calculate your debt to income ratio, simply divide your monthly bills by your total gross income for the month. Mortgage lenders like to see this around 50%; however some lenders will go higher with a premium mortgage rate. The lower your debt to income ratio, the better off you will be. Before applying to refinance your mortgage you should focus on paying down the balances on credit cards and making all of your payments on time. This will improve not only your qualifying ratios, but your raise your credit score as well.