If you intend to apply for a commercial real estate loan, a great term to know is mortgage constant. A mortgage constant is the percentage you pay annually in comparison to the total loan amount.
How to calculate the mortgage constant?
To calculate this amount, you'd add the monthly payments for a single year and divide the remaining by the total amount of the mortgage loan. For example, you may have a $500,000 mortgage and pay $2,000 a month at a 4 percent interest rate.
- $2,000 x 12 = $24,000
- Mortgage constant: 4.8 percent = ($24,000 / $500,000)
Mortgage constant versus capitalization rate
The cap rate (capitalization rate) is used to determine the ratio of the net operating income (NOI) in comparison to the original purchase price, which can demonstrate the rate of return.
If the constant rate is higher than the cap rate, this indicates there may be a negative return on investment, but if the cap rate is higher, there will be a positive return on investment.
Benefits & risks of using the mortgage constant
The benefit of using the mortgage constant is it provides a quick way to assess the value of a property you plan to invest in and how profitable it can be.
On the downside, using a mortgage constant only provides a fixed viewpoint of the investment without taking into consideration when interest payments are made. For this reason, it’s best to use the mortgage constant as one of many ways to examine the potential of an investment.
If you’re interested in finding out a mortgage constant for a property, there are free tools found online which can help you make the calculations on your investment journey.
About the Author
Carolyn Andrews
Carolyn Andrews has over 30 years licensed Brokerage experience in both California and Colorado. Born in England, Carolyn moved to California in 1980, then relocated to Denver, Colorado in 1991. Carolyn has also received recognition for Top Sales at RE/MAX Alliance Aurora in 2007-2008 and is a member of the RE/MAX Hall of Fame & Chairman’s Club, as well as a recipient of the ReMax Lifetime Achievement Award. Carolyn has sold over 2000 homes personally in her career. Carolyn has been actively involved in many aspects of the Real Estate business including investment property, luxury homes, mountain resort property, skiin/ski out, REO/default management, loss mitigation, valuations, and disposition. She has been a speaker and panelist at several conferences and has been consulted on many occasions by various organizations in the REO/financial industries for her expertise and served on many boards. She has attended numerous ongoing classes to stay abreast of changes in the ever-evolving Real Estate industry. She is the prior State Director for Colorado for VAREP(Veterans Association of Real Estate Professionals). She is a member of 3 boards of Realtors including Metro Denver, Colorado Springs and Summit County mountain areas. She heads up The Andrews Group and is or has been an active member of NAR, CAR,REOMAC, CIPS, CRS, AREAA, NAPW, NAHREP, and is an original member of the ELITEReal Estate network. She was ranked #1 for most homes sold in Denver 2007 by Denver Board of Realtors, #2 for 2008, and #2 for 2009, #5 in 2010 and #4 in 2011 and has been consistently in the top 10 ever since. Carolyn Andrews has been a top rated Endorsed Local Provider for the Dave Ramsey Organization and also a Top Producing agent for 2018 for the Homelight Company.
