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Mortgage Constant (Rm):
Mortgage constant is a measure used to determine the amount of money that needs to be paid each period (typically monthly) to cover both the principal and interest of a mortgage loan (also known as the loan constant or mortgage loan constant). It's often represented as a percentage or decimal and is used to calculate the total amount of payments required to pay off a loan over a specific period of time. One of the six functions of a dollar found on standard financial tables.
Here's a working example of how to calculate the mortgage constant using the ratio of debt service to mortgage principle:
Assume you have a 30-year fixed-rate mortgage for $200,000 with an interest rate of 4%. The monthly mortgage payment (including both principal and interest) is $955.07. To calculate the mortgage constant using the debt service to mortgage principle ratio, follow these steps:
Calculate the annual debt service. Multiply the monthly mortgage payment by 12 to get the annual debt service. In this example, the annual debt service is $11,460.84 (i.e., $955.07 x 12).
Calculate the mortgage principle. The mortgage principle is simply the amount of the loan, which in this case is $200,000.
Divide the annual debt service by the mortgage principle. This gives you the mortgage constant or loan constant. In this example, the mortgage constant would be $11,460.84 ÷ $200,000 = 0.0573 or 5.73%.
So the mortgage constant for this example would be 0.0573 or 5.73%. This means that the borrower would need to pay $955.07 each month to cover both the principal and interest of the loan, and over the life of the loan, the borrower would need to pay a total of $11,460.84 each year, which is equal to 5.73% of the original loan amount.
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Here are the steps to solve for the mortgage constant using an HP12C financial calculator:
Press the "f" key followed by "REG" to clear any previous calculations.
Enter the loan amount as a negative number using the "PV" key, followed by "200000" and the "CHS" key.
Enter the number of payments using the "N" key, followed by "360" (since it's a 30-year mortgage and payments are made monthly).
Enter the interest rate using the "I" key, followed by "4" (since the interest rate is 4%).
Calculate the monthly payment using the "PMT" key, which should be -$955.07.
Press "f" and then "FIN" to switch to financial mode.
Press "I" to display the annual interest rate, which should be 4%.
Press "g" followed by "PMT" to calculate the annual debt service, which should be -$11,460.84.
Calculate the mortgage constant by dividing the annual debt service by the loan amount, using the formula: Mortgage constant = (Annual debt service) ÷ (Loan amount). In this case, the mortgage constant would be -$11,460.84 ÷ -$200,000, which equals 0.0573, or 5.73%.
So the mortgage constant in this example is 0.0573 or 5.73%, which means that the borrower would need to pay $955.07 each month to cover both the principal and interest of the loan, and over the life of the loan, the borrower would need to pay a total of $11,460.84 each year, which is equal to 5.73% of the original loan amount.
"Wit & Whimsy with the Dumb Ox: Unlocking Knowledge with Rhyme:"
Oh, mortgage constant, a formula so grand,
It helps you calculate the payment demand.
It's a factor that combines both principal and interest,
And gives you the total amount to pay, the number you can't contest.
You take the annual debt service, the total cost to pay,
And divide it by the mortgage amount, to know what to lay.
This gives you the mortgage constant, a percentage so neat,
And helps you compare loans, to find the one that's a treat.
It's a way to plan financially, for the long haul,
And to know exactly how much to pay, and to stand tall.
So when you're ready to buy a home, don't forget,
The mortgage constant formula is a tool you won't regret!