Windermere Re Utah - Park Ave
Jim Kelley, Windermere Re Utah - Park AvePhone: (435) 901-1262
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A beginners guide to understanding the mortgage constant

by Jim Kelley 02/20/2023

What is a mortgage constant  featured image

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

Jim Kelley

Originally from upstate New York, I moved to Park City soon after college to spread my wings and explore the western United States, taking full advantage of the world class golf courses, beautiful mountains and the greatest snow on earth. 20 years later I am grateful to still call Park City home.

Customer experience is my #1 objective. I have a passion for helping people realize their perfect Park City experience. My 22 years of resort management provided me with tremendous opportunity to work with so many different people from all over the world, delivering the services and experiences they desired and facilitating them to take advantage of all Park City has to offer.

Having played, worked and raised three children in Park City, my knowledge runs deep of the community and its surrounding areas, and all they have to offer. I am confident I can help you to find your next dream home in this wonderful community.