How to Calculate a Mortgage Constant

How to Calculate a Mortgage Constant
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A mortgage constant is a useful tool for a real estate investor because it simplifies and clearly shows how much the borrower will need to pay over a given period of time. This value is only useful for closed-end, fixed-rate mortgages. The calculation looks challenging, but with proper math and accurate values entered, you can easily ascertain the mortgage constant.

Step 1

Collect the required materials. Ensure you have the mortgage statement. This document will show your monthly payment -- including a principal and interest breakdown -- your balance and your interest rate. Your loan agreement will show the original amount borrowed and the confirmation that the loan is a closed-end variety. An amortization schedule will confirm your calculations on the mortgage constant.

Step 2

Write down the following formula: MC = interest rate / [ 1 - [ 1 / (1 + interest rate) ^n ]]. The following values represent MC: mortgage constant; interest rate: mortgage rate; ^n: exponent of term of loan.

Step 3

Try the following example. Find the mortgage constant for a $100,000 mortgage with an 8 percent interest rate and a 20-year term (240 months). Use the formula: MC = .08 / [ 1 - [ 1 / (1.08) ^20]]. When computed correctly, your mortgage constant should come to .10184.

Step 4

Figure your annual payment by simply multiplying your loan amount by the mortgage constant. In the example, this looks like $100,000 x .10184 = $10,184. Therefore, your annual payment on this mortgage will be $10,184.