Mortgage constant, also called "mortgage
capitalization rate
Capitalization rate (or "cap rate") is a real estate valuation measure used to compare different real estate investments. Although there are many variations, the cap rate is generally calculated as the ratio between the annual rental income produ ...
", is the capitalization rate for debt. It is usually computed monthly by dividing the monthly payment by the mortgage principal. An annualized
mortgage
A mortgage loan or simply mortgage (), in civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any pu ...
constant can be found by multiplying the monthly constant by 12 or by dividing the annual debt service by the mortgage principal.
A mortgage constant is a rate that
appraiser
An appraiser (from Latin ''appretiare'', "to value"), is a person that develops an opinion of the market value or other value of a product, most notably real estate.
The current definition of "appraiser" according to the Uniform Standards of Prof ...
s determine for use in the band of investment approach. It is also used in conjunction with the debt-coverage ratio that many
commercial bank
A commercial bank is a financial institution which accepts deposits from the public and gives loans for the purposes of consumption and investment to make profit.
It can also refer to a bank, or a division of a large bank, which deals with cor ...
ers use.
The mortgage constant is commonly denoted as Rm. The Rm is higher than the interest rate for an amortizing loan because the Rm includes consideration of the principal as well as the interest. The Rm could be lower than the interest for a negatively amortizing loan.
Formula
Where:
*i = Interest
*n = Total number of months required to pay off the loan.
*m = Number of payment months in a year (12).
example:
(0.055/12)/(1-(1/(POWER(1+(0.055/12),360))))*12 for MS Excel
References
Mortgage industry of the United States
Interest rates
Mathematical finance
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