What is DEBTservice? Debt service basically is the exact amount of money required to service a loan, mortgage, or other form of debt. The debt service is usually the money required to make the initial payments on a loan to someone. Typically the monthly payment on an unsecured loan is around ten thousand dollars per month. This leaves a monthly payment of around five thousand dollars. In a few cases the original lender may have been willing to allow for more debt service if the monthly payment was higher, but this rarely happens.
To calculate monthly payments, it is first necessary to determine the principal owed. This is done by adding the amount of each monthly payment together. Then the amount of interest will also need to be figured into the equation. This is a very important part of the annual debt service because the interest rate is usually what determines how much of a principal payment is made at any given time.
In order to determine the total debt service ratio, it is important to divide the principal owed by the total amount of principal paid. This is done by dividing the total principal owed by the total number of payments. Then multiply the ratio by twelve to get the percentage of principal versus the amount of interest paid. This is called the TDR or Total Debt Service Ratio.
The other thing that needs to be determined is the annual debt service coverage ratio for each type of financial obligation. The calculation of this ratio is similar to the previous example where it is important to divide the principal owed by the total amount of interest paid. This is done again using the TDR to determine the ratio of principal to net operating income.
A calculation of the Annual Net Operating Income can be made using the NNI column in the user file. The NNI is the annual debt service payment that is received minus the total interest expense over the period of the agreement. The column to the right of the NNI shows the primary payments used to pay interest and principal on the loan(s). The monthly primary payments are shown in the Month column while the Month Until column shows the months in which the interest expense will occur. The final column to the right of the NNI shows the primary payment that will be made each month until the loan has been repaid.
The calculation of the Annual Debt Service Coverage ratio can be done by dividing the NNI by the number of months in the loan term. Once the loan term has been entered the lender will have an idea of the amount of money they are receiving in interest each month to repay the principal. For most lenders there are many different ways to enter the NNI. This can be done by manual calculation or by entering the information into the online mortgage broker service. Mortgage brokers have many different lenders that can be compared so that the best deal possible can be obtained.
The annual debt service coverage costs that are associated with refinancing will depend on many factors including the type of loan used, the amount that is being refinanced, the length of the loan term, the rate of interest to be paid, and the term of the mortgage. Most mortgage lenders will offer different packages and terms for the different products that are offered. Many people choose to take advantage of the lower interest rates by refinancing for the long term. There may be other benefits that can be obtained from this type of arrangement as well.
As a part of the annual debt service coverage cost when refinancing a commercial loan the new commercial loan payments will be calculated. When comparing loans, it is important to compare not only the Annual Percentage Rate but also what interest will be charged. It is important to remember that the longer term the loan term the less money will be left over to cover the new commercial loan payments. When the term length is shorter the larger portion of the payment that will go toward the interest will be eliminated. As with any investment there is always risk in a new commercial loan, especially when it is a large one, however the upside potential is great.