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
Diana Hellman
Diana Hellman's passion for Larchmont inspires her more than 20 year real estate practice. As a certified buyer's representative, "The development of a solid and trusting relationship with my buyers and sellers is what I strive for." This success, primarily built on client referrals and repeat business, comes from her knowledge of what makes Larchmont unique: it's school system, recreational facilities, services and the special qualities that pervade this village's atmosphere. A former educator with a background in psychology, Diana knows that people don't want a sales pitch, but rather reliable, timely information. She and her husband have been residents of Larchmont for over 40 years. Her 3 children have attended the Mamaroneck Public Schools. She can give you expert advice with the sale or purchase of your home. Awards/Distinctions Multi-million dollar club- Westchester Board of Realtors International Diamond Society (8 million plus in sales), 5-Star agent in 2024. Gold Award- WBR (5-8 million dollars in sales) Silver Award – WBR (3-5 million dollars in sales) Memberships National Association of Realtors New York State Association of Realtors Westchester Board of Realtors Westchester Multiple Listing Service Community Former executive board member of the Central School Former selection school delegate for election of school board candidates Former executive board member of the Friends of the Emelin Theatre Former executive board member of the League of Women Voters