Does somebody have a good explanation of what, conceptually, the sinking fund component in the band of investment method of calculating capitalization rates represents? I understand the calculation but can’t really figure out why it is included. Much appreciated, Mike
you need 1 in Principal and interest in the future at the end of the loan. you need to save money every month - to accumulate to that 1 at the end of the loan. that’s what the Sinking Fund is calculating. If you had the level Payment for the Mortgage -> Level Payment * 12 / Loan Amount will give you the same number as sinking Fund Factor * 12 (Monthly converted to Annual) + Interest rate on Loan
Like I said, I understand the calculation, but conceptually I am not sure why a premium is added to the morgate rate.