Having a plan in place to pay off your mortgage loan over time is an important component of homeownership. Mortgages are a serious financial commitment, 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 numerical 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.”
What Is A Mortgage Constant?
A more specific type of loan constant, a mortgage constant is the percentage of a total fixed-rate mortgage loan amount that’s being paid off each year by the borrower. 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, a 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 or not the property they’re investing in will be profitable for them.
It’s important to note, however, that mortgage constants cannot be applied to variable-rate mortgages, as the fluctuations in the interest rate over the lifetime of the mortgage loan make it impossible to accurately predict future debt services or constants.
How To Calculate Your Mortgage Constant
To determine what your annual mortgage constant is, add the cost of your monthly 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), and then divide that number by your total loan amount. From there, multiply the resulting decimal by 100 to determine the percentage of your debt service that’s being paid each year.
Mortgage Constant Vs. Cap Rate
While the mortgage constant shows the relationship between a borrower’s annual debt service and their total loan amount, the cap rate (or “capitalization rate”) shows the relationship between annual 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 mortgage loan you have on your home can help homeowners to 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.
Have more questions about your mortgage? Talk to a Home Loan Expert at Quicken Loans® today!