Loan Constants

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Back in the old days, before they made hand held calculators, mortgage loan agents would use a “loan constant” to compute the monthly payment on a home loan. Some big mainframe computer would compute the monthly payment for 30 years on a loan of $1,000 at each given interest rate.

If interest rates increased from 4% to 4.5%, your branch manager would tell you that the new loan constant was $5.07. If the borrower was seeking a $20,000 loan, the loan agent would then simply multiply $5.07 times 20 to arrive at the buyers’ new monthly payment of $101.34.

Whenever you discuss a debt service coverage ratio (DSCR) with a lender, you have to tell him what interest rate and amortization schedule you are using. Otherwise, the ratio would be meaningless to the lender.

For example, suppose the loan amount was $400,000 and the NOI was $65,000. Here are just a few of the different possibilities:

1.31 based on a 12.0%, 30 year constant
1.48 based on a 9.0%, 20 year constant
1.25 based on a 13.0% interest only constant

When you prepare your Loan Summary or cover letter to your lender, always show the debt service coverage ratio in reference to some loan constant.

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