Alternate definition: A loan constant is the amount of interest and principal paid to a lender compared with the total loan amount.Alternate name: Mortgage constant
Figuring out your loan constant helps you determine what you’ll pay annually for that loan. Investors often look at the loan constant to determine whether a property is worth investing in.
How a Loan Constant Works
Borrowers can use loan constant tables and calculators to figure out the total cash they’ll have to pay annually to cover the interest and principal on a loan. You can figure out your loan constant using the following equation: Loan constant = Annual debt service / Loan balance For example, let’s say a borrower is considering buying a property that costs $300,000. The interest rate is 5% amortized over 30 years. Using a debt-service coverage calculator, we can determine that the annual debt service is $19,326. When you divide that number by $300,000, you get a loan constant of 6.4%. But what if the same loan was amortized over 25 years? In that case, your total debt service would be $21,045, and the constant is 7%.
Loan-Constant Tables
Before financial calculators became widely available, most borrowers would use loan-constant tables. These tables made it possible to calculate the annual loan payments without using a calculator. These tables contained information about their loan, including the total loan amount, interest rate, and loan terms. This would help borrowers figure out what their monthly payments would be.
Loan Constant vs. Cap Rate
Cap rate = Annual net operating income / Total cost or value If the loan constant is higher than the cap rate, that property is likely to lose money. If the two numbers are equal, the investor will break even. And a loan constant that’s lower than the cap rate is a profitable investment.
