loan capital | low interest | bank loans
the cost of capital for a property is called the loan constant constant or mortgage constant. all loans have a certain interest rate and unless there is an interest-only portion to the loan all loans will require a principal and interest payment. the principal is calculated based upon the amortization of the loan. thus if the loan has a 30-year amortization which is equal to 360 months the principal must be paid in 360 installments so the loan is paid in full on the last loan payment.
the quoted interest rate of a loan is strictly the amount of interest that loan accrues. the loan constant on the other hand is expressed as an interest rate that incorporates both the interest and principal repayment of a loan. the formula is:
loan constant = interest rate121 - 11 + interest rate12 ^ n
n = the number of months in the loan term
example 1: suppose an investor received a loan for $4000000 at a 5.50% interest rate with a 30-year amortization. we can calculate the required annual loan payments once the loan constant is known.
constant = .055121 - 11 + .05512 ^ 360
constant = .06813 x 100 = 6.813% rounded
annual payments = $4000000 * .06813 = $272520
while the property has an interest rate of 5.50% the investors actual cost of capital for the loan is 6.813% once the principal payment has been factored. if the above loan scenario has a 1.25x debt service coverage ratio dscr requirement then an investor knows that the property must have at least the following noi to support the loan:
$272520 x 1.25 = $340650
consider that the reverse also holds true. a borrower can factor his potential debt service loan with the loan constant as long as he knows the noi.
example 2: a borrower wants to refinance his loan. his noi is $560000 and he has heard that his local bank will give him an interest rate of 6.25% for 25 years with a minimum dscr of 1.25. what is the maximum loan he can borrower subject to an appraisal?
constant = .0625121 - 11 + .062512 ^ 300
constant = .07916 x 100 = 7.916% rounded
since the borrower knows the debt service coverage ratio must be 125% more than annual debt payments he can calculate the annual payments as the following:
$560000 = $448000
with $448000 of the propertys net operating income available to service the debt payments his maximum possible mortgage based on debt service would be:
$448000 = $5659424