Loan constant otherwise known as mortgage constant, has certain key features which would give us a clear idea of the concept.
With the risks and perks of commercial real estate the mortgage or loan constant gives the real estate investors a scale and a system through which they appropriate the total amount of debt should be paid annually in relation to the loan balance.
The first and foremost use and help this system gives the investor is that it is fast, has an easy approach and can be maintained with readily obtainable information.
But if we look at the frequent alterations in monthly loan amounts the mortgage constant should not be the only tool used in determining investments.
Debt and equity are the combination utilized in real estate transactions. The credit provided by investors has an all important effect and advantage on the investment, but the numerous terms and conditions which come with the loan present a constant risk factor and this is where the loan constant comes in as an easy way.
The mortgage constant is taken into consideration by investors.Comparing with the total loan amount the the interest and the principal are paid . It calculates both the principal and the interest on a repayment of a loan. The loan constant shows us the relation between the debt payable and the principal amount on a fixed commercial real estate credit. Here it must be mentioned that this is only applicable for loans which have fixed rate. A simple formula can be helpful for calculation theis,
MORTGAGE CONSTANT = ANNUAL DEBT SERVICE/ LOAN AMOUNT
With variable interest rates it is not possible to perfectly calculate the debt service on the loan amount.
Determination of the loan constant is used in many ways in commercial real estate. The most important usage is that it calculates both the interests and the principal payments for the loan. Before reaching a decisive point in the investment procedure the investors take the help of the loan constant to understand the future profit attainable from the investment. Lower mortgage constant on a loan means the debt payable is less for the borrower on both the principal and the interest. It is widely useful for the determination of mortgage payments and as it is calculated in percentage it can be applied in any type of loan.
