A beginners guide to understanding the mortgage constant
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
Daniel Martin, Higgins Group Private Brokerage, Licensed in CT, Lic. #RES.6767971
With over two decades of experience in Connecticut real estate, Daniel Martin is a seasoned Realtor at Higgins Group Private Brokerage, renowned for his exceptional market insight and unwavering client dedication. A lifelong Connecticut resident, Daniel's deep roots in the community, coupled with his extensive professional background, provide an invaluable advantage to both buyers and sellers across Fairfield and New Haven Counties.
Daniel's distinguished career is marked by consistent achievement, earning him the prestigious Connecticut Magazine 5 Star Realtor award from 2014 to 2025. He is a perennial Top Producer, recognized as both a Top Listing Agent and Top Selling Agent, a testament to his strategic approach and keen understanding of market dynamics. His expertise spans a broad spectrum of real estate needs, including guiding First Time Home Buyers, navigating transactions for Single and Multi-Family Homes, Land, New Construction, New Residential Developments, Condominiums, Downsizing, and Rentals.
Beyond his impressive track record, Daniel's professional affiliations include memberships with the National Association of REALTORS (NAR), Connecticut Association of REALTORS (CAR), Bridgeport Board of Realtors, Smartmls and Greenwich MLS. His foundational education in real estate from Naugatuck Valley Community College, complemented by studies at Connecticut School of Electronics and Housatonic Community College, underpins his comprehensive understanding of the industry.
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