Calculating a Mortgage Constant

A mortgage constant (denoted as Rm) is the ratio of annual loan payments to the full value of a fixed-rate mortgage. You can calculate the mortgage constant by dividing the total amount paid on the loan annually by the full amount of the loan. This is also called the mortgage capitalization rate.

For example, if you had a mortgage worth $300,000, and your monthly payments added up to $10,000 in 12 months, your constant would be about .03 Rm, or 3 percent. The formula looks like this:

annual payments / full loan amount = mortgage constant (Rm)

$10,000 / $300,000 = .033333 Rm

This formula is applicable only to fixed-rate mortgages.

Commercial Properties

The mortgage capitalization rate is also used to determine the profitability of a rental property. Lenders will use this figure in addition to the debt coverage ratio, which is calculated by dividing the annual income of the property by the annual debt payments. The debt coverage ratio should be greater than 1 to be considered profitable. For example, if a property generates $30,000 a year, and the mortgage payments amount to $27,000, the ratio would be 1.11 (27,000 / 30,000).

 

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