To calculate debt service, add up the principal and interest payments you owe on each loan over the year. The formula shifts depending on whether the loan amortizes, charges interest only, or carries a variable rate, but the goal is always the same: one number that shows how much cash is committed to servicing debt over a set period, usually twelve months.
Before you run any numbers, pull your loan agreements, promissory notes, and the most recent statements or amortization schedules. For each loan you need four things: the current principal balance, the annual interest rate, the payment frequency, and the fixed payment amount shown on your statement. If a loan has an adjustable rate, also note the current index value and the lender’s margin, because those two combine to set the rate at each reset.1Consumer Financial Protection Bureau. For an Adjustable-Rate Mortgage (ARM), What Are the Index and Margin, and How Do They Work?
Include every obligation with scheduled payments: mortgages, commercial term loans, equipment financing, vehicle loans, lines of credit with required repayment terms, and unsecured debts with fixed schedules. One thing to strip out on a mortgage: if your monthly check bundles property taxes and homeowners insurance into an escrow payment, those escrow amounts are not debt service. Only the principal and interest portions count.2Consumer Financial Protection Bureau. What Is PITI?
Standard Amortizing Loans
For a fixed-payment amortizing loan, the formula is straightforward:
Annual Debt Service = Periodic Payment × Number of Payments Per Year
A business paying $4,200 per month on a commercial term loan has an annual debt service of $50,400. If a second loan requires $1,800 quarterly, that adds $7,200. Total annual debt service across both loans: $57,600. The math works the same whether you pay monthly, quarterly, or semi-annually. Match the payment amount to the correct frequency and multiply.
The total payment stays constant month to month on a fixed-rate amortizing loan, but the split between principal and interest shifts as the loan ages. Early on, most of each payment covers interest and barely reduces the balance. Near the end, nearly the entire payment goes to principal. On a $300,000 mortgage at 5%, the first month puts roughly $360 toward principal and $1,250 toward interest; by the final year, those proportions essentially flip. Your annual debt service figure doesn’t change, but the mix matters at tax time because only the interest portion is deductible as a business expense. Repaying principal isn’t an expense in the eyes of the IRS.3Internal Revenue Service. Publication 535 – Business Expenses
Interest-Only Loans
Interest-only loans need a different formula because the principal doesn’t come down during the interest-only period:
Annual Debt Service = Outstanding Balance × Annual Interest Rate
A $500,000 loan at 6% produces $30,000 in annual debt service. As long as the rate stays fixed, that number doesn’t budge from year to year, because the balance doesn’t move. With a variable rate, recalculate at each reset using the new rate.
The trap is what happens after the interest-only window closes. At that point, the full original balance has to amortize over whatever time remains on the loan. A 30-year mortgage with a 10-year interest-only period leaves 20 years to pay off the entire principal, and the monthly payment can jump sharply. If you’re projecting debt service more than a year or two out, model both phases: the lower interest-only period and the higher fully amortizing payments that follow.
What Happens at a Rate Reset
When a variable-rate loan resets, the lender recalculates your payment using the new interest rate. For most adjustable-rate mortgages this happens at each adjustment period. The new rate equals the current index value plus the lender’s fixed margin.1Consumer Financial Protection Bureau. For an Adjustable-Rate Mortgage (ARM), What Are the Index and Margin, and How Do They Work? Drop that rate into whichever formula applies.
Watch for payment caps that limit how much the monthly amount can rise at each reset. If the capped payment doesn’t cover the full interest owed, the unpaid interest gets added to your balance and you end up owing more than you borrowed. That’s negative amortization, and it can quietly push your real debt service obligation above what the payment schedule shows.4Consumer Financial Protection Bureau. If I Am Considering an Adjustable-Rate Mortgage (ARM), What Should I Look Out for in the Fine Print?
Balloon Payments
A balloon loan keeps payments low for most of its term, then demands a large lump-sum payment of the remaining principal at maturity. During the regular payment years, calculate annual debt service the same way as any other amortizing or interest-only loan. In the year the balloon comes due, debt service spikes, because that final principal payment is part of what you owe that year.
A five-year commercial loan with monthly payments of $3,000 based on a 20-year amortization has an annual debt service of $36,000 in years one through four. In year five, you owe $36,000 in regular payments plus whatever principal remains, which can run to hundreds of thousands of dollars. Borrowers who don’t plan for this either refinance or hit a serious liquidity crunch. Banking regulators specifically flag balloon loans as carrying refinance risk, meaning the borrower may not qualify for a new loan when the balloon comes due.5Office of the Comptroller of the Currency. Commercial Lending: Refinance Risk
Checking Whether Your Income Covers It
Once you have annual debt service, the next question is whether your income can carry it. For a business or income property, that’s the debt service coverage ratio:
DSCR = Net Operating Income ÷ Total Annual Debt Service
Net operating income is total revenue minus operating expenses, before debt payments. A property generating $150,000 in NOI against $120,000 in annual debt service has a DSCR of 1.25, meaning it produces $1.25 for every $1.00 owed in debt payments. A DSCR of exactly 1.0 means income covers debt with nothing to spare; below 1.0, operations alone can’t cover the payments. Most commercial lenders want a cushion above 1.0, commonly at least 1.20, and may go as low as 1.10 for stable long-term income like government-leased buildings.6Office of the Comptroller of the Currency. Appendix A: Income Property Lending Section 210
For Individuals: Debt-to-Income
If you’re calculating debt service as an individual rather than a business, the equivalent measure is the debt-to-income ratio:
DTI = Total Monthly Debt Payments ÷ Gross Monthly Income
Total monthly debt payments include your mortgage (or expected mortgage payment), auto loans, student loans, minimum credit card payments, and other recurring debt obligations.7Consumer Financial Protection Bureau. What Is a Debt-to-Income Ratio? Gross monthly income is your pre-tax earnings. A DTI of 36% or lower is considered strong by most mortgage lenders, though some programs accept higher. The lower your ratio, the more room you have to absorb rate increases, unexpected expenses, or an income disruption.
The discipline is the same in every version: add up every dollar you owe lenders over the period, use the formula that fits each loan type, and compare the total honestly against the income available to cover it.