To calculate the loan constant, the borrower would require a few terms from the lender or the banks that they are borrowing the loan from.
These terms are; interest rate, loan principal, payment frequency, and loan tenure. Once you have these terms from the lender or the bank, you can calculate the annual debt service by multiplying your monthly payments by 12.
After you have your annual debt service, you can use the following formula to calculate the loan constant.
Loan Constant = Annual Debt Service / Total Principal Amount
Let us take an example.
If a borrower takes a mortgage of $250,000 to buy a new property with an interest rate of 5.75% for 30 years.
With the use of our online calculator, you can get the monthly payments for the mortgage which is $1,458.93. Hence the annual debt service would be $1,458.93 x 12, which equals $17,507.16.
Loan Constant = 17507.16/250000
Loan Constant = 7.00%
So in our example, the annual loan constant for the borrower would be 7%. If the same debt is amortized for 25 years the annual mortgage constant for the borrower would be7.5%.
The borrower can use the same formula to calculate the mortgage constant from the quote from different lenders and loan programs and decide which one is best.