The Mortgage Constant: A Fast Way to Compare the True Cost of a Loan

What Is the Mortgage Constant?

The mortgage constant, sometimes called the loan constant, is the annual cost of a loan expressed as a percentage of the amount borrowed. It rolls both principal and interest into one figure.

Because it captures the full annual payment rather than just the rate, it tells you what a loan actually costs to carry each year for every dollar borrowed. That makes it more honest than the interest rate alone.

Why the Interest Rate Is Not Enough

Two loans at the same interest rate can cost very different amounts to service. A 30-year loan and a 15-year loan at 7% carry the same rate, but the 15-year loan has a far higher mortgage constant because it also repays principal much faster.

The mortgage constant folds the amortization term into the picture, so it reflects the real cash demand of the loan. Shorter terms raise the constant even when the rate is unchanged, which is exactly what an investor watching cash flow needs to see.

Worked Example

A $300,000 loan at 7.25% over 30 years has a monthly payment of about $2,047, or roughly $24,560 a year. The mortgage constant is $24,560 / $300,000, or about 8.2%.

Shorten the same loan to 15 years and the annual payment jumps to roughly $32,850, lifting the constant to about 10.9%. Same rate, same balance, very different annual cost, and the constant makes that gap obvious at a glance.

The Key Comparison: Constant vs Cap Rate

• If the cap rate is higher than the mortgage constant, leverage is positive and borrowing lifts your return on equity.
• If the cap rate equals the constant, leverage is neutral and adds risk without added return.
• If the cap rate is below the constant, leverage is negative and borrowing drags your return down.
• This single comparison is a fast test of whether debt is helping or hurting a deal.
• It explains why the same property can be a good buy at one loan structure and a poor one at another.

How to Use It

Use the mortgage constant to compare financing options quickly and to sanity-check leverage before you run a full model. If a property caps at 6% and your loan constant is 8%, borrowing heavily will pull your cash-on-cash return down.

It is a screening tool, not a substitute for a complete cash flow projection. Once the constant tells you leverage is working in your favor, confirm it with a full analysis that includes taxes, insurance, vacancy, and reserves.

Frequently Asked Questions