What Is A Mortgage Constant And How Do You Calculate It?

5 Min Read
Updated Dec. 21, 2023
Modern farmhouse style home with porch.
Written By Victoria Araj

Having a plan in place to pay off your mortgage loan over time is an important component of homeownership. Mortgages are serious financial commitments, and it’s essential for homeowners to make sure they’re able to keep up with their monthly payments to avoid mortgage default or even foreclosure on their property.

There are a few terms related to mortgage payments that can be useful for homeowners to be familiar with as they establish their repayment plan. One of these terms is “mortgage constant.” Let’s take a closer look at what this metric can be used for and how you can calculate it yourself.

What Is A Mortgage Constant?

A mortgage constant is the percentage of money paid each year of a loan term compared to the total amount of the mortgage. Borrowers can calculate their mortgage constant themselves by totaling the cost of their annual payments and dividing it by the total loan amount.

It’s important to note that mortgage constants can’t be applied to variable-rate mortgages, as the fluctuations in the interest rate over the lifetime of the loan make it impossible to accurately predict future debt services or constants.

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Why Is A Mortgage Constant Important?

It can be helpful for loan borrowers to have an accurate sense of their mortgage constant in order to understand how much of their mortgage they’re paying off annually, and to make sure they have enough cash flow to be able to cover the amount they’re expected to pay each year.

For mortgage lenders, mortgage constant calculations can be used to help determine whether a prospective borrower has enough income to afford an estimated level of loan repayment each year and how high of a risk it would be to approve them for a mortgage.

For real estate investors, determining their mortgage constant can play a role in their assessment of whether the commercial real estate they’re investing in will be profitable for them.

How To Calculate Your Mortgage Constant

Homeowners and real estate investors have a few tools at their disposal to help them determine their mortgage constant. Let’s look at two of the most effective methods.

Finding The Mortgage Constant With A Formula

The mortgage constant formula looks like this:

Mortgage constant = (annual debt service ⁄ total loan amount) × 100

Let’s break that down further:

  1. Find your annual debt service. First, add the cost of your monthly loan payments for an entire year of your mortgage (more commonly referred to as your annual debt service, which can be calculated using your principal, interest rate and amortization schedule).
  2. Divide by total loan amount. Next, divide the number you got in the first step by your total loan amount.
  3. Calculate the percentage. From there, multiply the resulting decimal by 100 to determine the percentage of your debt service that’s being paid each year.

Make sure to never include property taxes and insurance in your monthly payment. Only use principal and interest payments to determine your mortgage constant.

Mortgage Constant Formula Example

Here’s an example to help you get started. First, you’ll need to determine your monthly mortgage payment. If you’re still shopping for homes, you can estimate your monthly payment by using our mortgage calculator.

For instance, let’s say you have a fixed-rate loan for $320,000 with a monthly mortgage principal and interest payment of $1,800. By multiplying your monthly payment of $1,800 by 12, you’ll get an annual debt service of $21,600.

First, you’ll plug these numbers into the formula:

Mortgage constant = ($21,600 ⁄ $320,000) × 100

Next, divide $21,600 by your total mortgage amount, $320,000, to get 0.0675. That value is your mortgage constant in decimal form. Slide the decimal two places to the right by multiplying by 100, and you’ll get your final answer: a mortgage constant of 6.75%.

Using Mortgage Constant Tables

Mortgage constant tables are another way to determine the percentage of your mortgage that you’re paying off each year. Constant tables include predetermined mortgage constant percentages, making them a great option for those who would prefer to avoid a manual calculation.

Most loan constant charts include the mortgage term length on one axis and the fixed interest rate on another. To use the table, identify the interest rate and amortizing loan period that matches your mortgage and locate the cell where the two variables intersect.

Using a table to determine constant percentages is less common today, thanks to mortgage calculators that make it even easier to make financial computations.

Amortization Calculator

Amortization Calculator

Use our amortization calculator to see how your monthly payment breaks down and how additional payments can save you money on interest.

Mortgage Constant Vs. Mortgage Capitalization Rate

While the mortgage constant shows the relationship between a borrower’s annual debt service and their total loan amount, the mortgage cap rate (or “capitalization rate”) shows the relationship between annual net operating income and the total loan amount.

Calculating the cap rate and comparing it against the mortgage constant can be particularly useful for real estate investors, as it can help them determine the rate of return on their investment and whether the net income accrued from their investment property is worth it.

To calculate your cap rate, take the annual net income from the investment property and divide it by the total mortgage loan amount. If the resulting percentage for the cap rate is higher than the mortgage constant, the property is profitable for the investor.

The Bottom Line

Knowing the mortgage constant for the home loan you have can help you establish a strategic repayment plan that aligns well with the rest of your financial obligations. For lenders and investors, mortgage constants can be a valuable numerical indicator of whether a potential investment opportunity is worth the risk.

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