For all homeowners, they must have a plan in place to clear their mortgage amount over time and ensure that they can able to maintain their monthly payments to avoid any sort of default or even foreclosure on their home or property. It is very important to understand that mortgages are one serious financial commitment that needs to be fulfilled.
Out of a few critical terms related to mortgage loans and payments. ‘Mortgage Constant’ is one term that is very useful for all of you as homeowners to know and understand, as you establish a full proof repayment plan.
Understanding Mortgage Constant
Understanding mortgage constant in simple words – it is the quantity or percentage of the money you pay against service debt over a year (on annual basis), divided by your total loan amount. The result of this calculation is expressed in percentage, which means, it reflects the percentage of the total loan that you pay every year.
The idea of a mortgage constant is to help homeowners know how much they will have to pay each year against the mortgage amount. As for owners, they always want lower mortgage constant as this would mean lower annual debt servicing costs for them.
The main purpose of mortgage constant is to let you know, how much cash you need annually to service your mortgage loan. The calculations are done by dividing the annual debt service on the loan by the total value of the loan.
How Mortgage Constant is used by different parties?
- Banks and Financial Institutions: Use mortgage constant as a debt-coverage ratio. This means that the mortgage constant is used to determine if the mortgage borrower has the required income to take care of the mortgage constant.
- Real Estate Investors: Use a mortgage constant while taking out a mortgage to buy any property. As an investor, they will want to ensure that they take enough rent to cover the cost of annual debt servicing on the mortgage loan.
Using HELOC to pay off the mortgage
Home Equity Line of Credit, commonly termed as HELOC, can be used for just about anything and that also includes paying whole or part of your mortgage balance. HELOC is somewhat like a credit card – you get approved to borrow a sum of the amount and can withdraw from that amount via a pre-determined draw period. The only difference it has from a credit card is that you can borrow much more than a credit card and that too at lower rates of interest.
Using HELOC to pay off your mortgage is a good idea, but you will need to find out that the amount that you can borrow is either equal to or more than what you owe against the mortgage. To know this better, it is always advisable to use the mortgage accelerator calculator HELOC. With the use of this calculator, you can see what it will take to pay your Home Equity Line of Credit, and what is needed to change at your end, so that you comfortable meet your repayment goals.
Knowing your mortgage constant on your mortgage loan will always aid you with strategic insight to plan your repayment along with aligning with the rest of your financial obligations. For investors and lenders, the mortgage constant is a great tool to tell that whether an investment is worth taking the risk or not.