What is a Mortgage Constant?

The mortgage constant is the real estate calculation used to measure the amount paid on a mortgage loan by the borrower each year of the loan. In a fixed-rate mortgage, which contains interest rates that never vary, the amount paid on the loan will be the same every year. Information that factors into the calculation of the mortgage constant includes the amount of payments due over the life of the mortgage and the interest rate. Comparing this constant against the amount of return gained from a revenue-earning property can help investors determine if the real estate in question is a worthwhile investment.

Mortgages are loans which allow people to buy some sort of real estate property. The general process requires the person intent on buying the property to come up with a down payment that comprises a small percentage of the price of the property. A mortgage lender loans the rest of the money for the purchase, and receives from the borrower regular loan payments with interest added in return. Knowing the mortgage constant allows investors to know how much they'll be paying on their loan each year.

Although the formula for determining the mortgage constant rate is a complicated one, it yields a percentage that can easily be converted into the amount owed on the mortgage each year. For example, imagine the constant rate on a mortgage worth $200,000 US Dollars (USD) is determined to be 10 percent. That means that 10 percent of the $200,000 USD, or $20,000 USD, will be paid on the mortgage by the borrower each year.

As for the formula to calculate mortgage constant, it depends on the length of the mortgage and the payment terms. Some mortgage agreements, for example, demand that payments be made quarterly, or four times a year. Over the course of a 30-year mortgage, this means that the borrower will make 120 payments. By contrast, a 30-year mortgage paid in monthly installments would require 360 payments.

Thus, the amount of payments, along with the stated interest rate, ultimately determine the mortgage constant, which can then be used by investors to help gauge the value of a commercial property. Generally, this is done by comparing the constant rate to the unleveraged return, which is the amount of return on investment that would be received without borrowing to buy the property. This comparison helps investors understand whether to take up a mortgage loan or whether to pursue a property at all.