Appraisers' Free Forum

**Bill Caudell** · Posted: Thu Jan 17, 2008 7:18 pm Post subject: Mortgage Coefficient

Please explain how you derive the number that is the "mortgage coefficient".
I know it is a multiplier, but do not know how you derive the number?
Not urgent, just trying to understand this for the sake of understanding.
I am not performing an assignment, nor do I plan to, as this is above and beyond me.
Just doing some reading, ran across this, and cannot figure it out.
I have googled and searched the net, but still need some explaination from someone that utilizes and understands
the "mortgage coefficient".

Thanks in advance for your time in explaining this.
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Bill Caudell

**Tina** · Posted: Thu Jan 17, 2008 11:38 pm Post subject:

Where did you run across this term??? I've not heard it before...

Could you be meaning a mortgage constant?

TB

M L · Posted: Fri Jan 18, 2008 12:53 am Post subject:

Where I am, we have such good and plentiful market data that developing a cap rate is easy. However, I have used that method as a check and balance to support a weak market derived cap rate. Other than that, you wouldn't use it much unless you were a big bank Chief Reviewer... or just trying to learn it enough to pass a test. Laughing

I'm not really smart enough to explain it, I just understand the concept and use the spread sheets that I was taught to use. Rolling Eyes

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Ya can't keep trouble from visitin, but you don't have to offer it a chair.

**Bill Caudell** · Posted: Fri Jan 18, 2008 6:58 am Post subject:

**bkirksey** · Posted: Sun Jan 20, 2008 7:59 am Post subject:

Do you mean the band of investment technique? Which is

LTV X Rm(Mortgage Constant) = XYZ
Equity x Re(Equity yield/dividend) = ABC

Overall Rate = XYZ+ABC

Because your above formula I have never seen before, and I just took my MAI comp exam and they had every possible formula on there.

**Bill Caudell** · Posted: Sun Jan 20, 2008 9:49 am Post subject:

**Jim Plante** · Posted: Sun Jan 20, 2008 1:03 pm Post subject:

Bill,
The term you're looking for is "mortgage constant", not "coefficient," although I wouldn't go so far as to say the latter is never used. One of the goldarnedest most confusticating things about learning income cap is the plethora of terms that mean the same thing.

The mortgage constant is the sum of the return ON capital and the return OF capital. It is calculated using the PMT function on the 12C (or the PMT function in Excel, for that matter.) Just figure the monthly payment on $1 at the prescribed interest rate and term, and multiply by 12 to get the annual mortgage constant. That is the figure that you insert for Rm in the formula Ro=Rm+Re.

Remember that those R's on the right side of the equation can be read "Return to the mortgage" and "Return to the equity"; both are percentages. The return to the mortgage is the TOTAL return, i.e., return OF mortgage money as well as return ON mortgage money.
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Jim Plante

**Edd Gillespie** · Certified General Joined: 13 Aug 2007 Posts: 2282

Jim is right on with what I think is going on. One constant (no pun intended) in appraising is that the words will change, if not their meaning. maybe its a planned obsolescence thing to keep us going to classes. The only part I think he missed is that in the example posted by Bill the objective is to find the coefficient (constant) for a seasoned loan for its 16th year.

Thanks for this Bill. I think most of us had long ago lost track of coefficients, but not constants.
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Edd “In the real estate economy, there are no guarantees that reason will prevail in a market where emotions run high and the amount of misinformation runs deep.” Jonathan Miller in The Matrix. So what’s an appraiser to do?

**Bill Caudell** · Posted: Mon Jan 21, 2008 8:56 am Post subject:

Thanks for replies and also the PM from Edd.

It put me on the right track.

I do not use this formula in my appraisal practice, as I am not qualified nor competent to do so, just saw something I felt was worthy of my time to try and discover more about .

Thanks again.
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Bill Caudell

The Dog · Member Joined: 23 Feb 2008 Posts: 2

mortgage coefficient (C). A multiplier in the Ellwood formula to compute a capitalization rate. The mortgage coefficient is a function of the terms of the mortgage loan, the projected ownership period, and the equity yield rate.