Mortgage Constant: Definition, Formula, & Complete Explanation

By: ROS Team

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Most borrowers strive to pay off their loans on time. This is also a goal for homeowners who have taken out a home loan to pay for their property. Borrowers who fail to do face defaulting on the loan, which means a major negative impact to their credit score among other financial penalties. As you evaluate your monthly mortgage payment, it’s important to factor in the mortgage constant. In this article, we’ll explain what this is and why it’s important to understand.

What is a Mortgage Constant?

A mortgage constant, or loan constant, is the ratio of annual payments in relation to the total loan amount. This ratio is usually expressed in the form of a percentage. By calculating the mortgage constant, borrowers can get a better idea of how much they’re paying towards their loan each year and how much they’ll need to pay to pay off the loan.

Mortgage lenders use the mortgage constant to determine whether a borrower is capable of meeting the annual payment necessary to pay off the loan during the given loan term. Real estate investors use the mortgage constant to determine whether their initial financial investment in a property will yield a profit.

Monthly Mortgage Payment
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How to Calculate Your Mortgage Constant

There are a few methods or tools available for you to use to calculate the mortgage constant. Let’s look at some of the most common ways:

Calculating Mortgage Constant by Formula

 Mortgage Constant = Annual Debt Service/Loan Amount

The annual mortgage constant is determined by adding the amount of your monthly mortgage payments for a year and then dividing that amount by the total loan amount. From there, simply multiply that number by 100 to get the percentage of the debt service you’ll pay annually. This calculation with giving you some idea of what your monthly payments should be. One thing to note with this calculation: the mortgage constant only considers the loan’s principal and interest amounts; it doesn’t include insurance premiums and property taxes.

The mortgage constant formula is now the most common way to calculate loan constants.

Mortgage Constant Tables

Another method for determining your mortgage constant is by using a mortgage constant table. This method removes the work of calculating the mortgage constant; borrowers only have to know their loan term, total loan amount and the interest rate to determine the mortgage constant. Mortgage constant tables were more popular before mortgage constant calculators were available.

Pros & Cons of Using the Mortgage Constant

The main advantage of using the mortgage constant as a tool for evaluating property investments is its quick and easy. Moreover, the tools required for this process are basic and easily available.

The main disadvantage of the mortgage constant is it only captures the percentage for a moment in time and not over the life of the loan. This is key if the loan doesn’t have a fixed interest rate. In addition, the total loan amount will constantly change whenever a principal and interest payment is made.

Mortgage Constant vs. Capitalization Rate

It’s helpful to know the difference between the mortgage constant and the capitalization rate, particularly in terms of a commercial property’s profit. In this context, the mortgage constant can be used to find the property’s annual rate of return if it was bought with cash. You can use the mortgage constant and the capitalization rate to determine whether your property will generate a profit.

The Bottom Line

A mortgage constant is a tool used by real estate investors to determine their actual total debt when borrowing money to buy property. The best thing about this tool is that it is quite easy to use; all you need is basic information to calculate your results.