Mortgage Constant

Posted in Finance, Accounting and Economics Terms, Total Reads: 298
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Definition: Mortgage Constant

Mortgage constant or mortgage capitalization rate refers to the portion of debt that is serviced every year to the total value of the loan. This is only applicable for mortgages that have a fixed interest rate.


Annual mortgage constant=(12*i)/((1-(1/(1+i)^n )))

 

Where i = Annual mortgage interest rate calculated per month

n = term of the loan in months

For e.g. If the term of the mortgage loan is 20 years with an annual interest rate of 7.5% to be paid on a monthly basis. Then the annual mortgage constant is given by

i= (7.5%)/12 (interest rate per month) = 0.00625

n= 240 months


Annual mortgage constant=(12*.00625)/((1-(1/(1+.00625)^240 ))) = .0967

 

If the loan value is $100,000 then the annual mortgage payment would be $9,670. So a loan with 7.5% interest rate would be serviced with an annual interest payment of $7500 and amortized with $9,670 annually i.e. $2170 will go towards principal payment.


In case of commercial or leasable property, the mortgage constant can be used to calculate the highest loan value that could be given to a property in comparison with the income that is likely to be generated by the property.

 

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