What is a Debt Service? |
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Answer:
Debt service refers to the payments made over a specific timeframe Likewise, borrowers with a home equity loan must send monthly payments to the second lien holder. Once the lender receives payment, monies are applied to the interest and principle. At the outset, the bulk of payments reduce the interest owed, wherein the mortgage balance remains about the same. Gradually, a reversal occurs and the bulk of payments start to reduce the balance. In the real estate market, many buyers determine a good investment by calculating the debt service ratio on a property. This is the ratio of income to debt payments. For a property to be a good investment, the debt service ratio must be high. For example, if a real estate investment generates a $40,000 a year, and the mortgage payments are $30,000, this is good deal because the cash flow is positive. Moreover, positive cash flow makes it easier to investors to borrower additional funds for the property. Trackback(0)
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