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  4. How to Calculate a Mortgage Constant

How to Calculate a Mortgage Constant

April 30, 2009
By: Claudia Louise Aires
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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.

How to Calculate a Mortgage Constant
How to Calculate a Mortgage Constant
credit: shironosov/iStock/GettyImages

Step

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

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.

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Step

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

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.



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