Proper Accounting for Mortgage Payments

Mortgage payments are one of the most common transaction types in a rental property owner’s books. For many investors they are also the largest monthly cash outflow. Because of their frequency and size, properly recording your mortgage payments is key for keeping accurate books on your real estate investments.

A BREAKDOWN OF MORTGAGE PAYMENT COMPONENTS

You probably know that paying down your loan principal is one way that you build wealth as a real estate investor. This principal paydown occurs month by month as a portion of your payment is applied to your outstanding loan balance. You also pay interest on the money you’ve borrowed, and a portion of your payment may be deposited to a separate escrow account to cover common expenses such as homeowner’s insurance, property taxes, HOA fees, and PMI.

Unfortunately many amature bookkeepers make the mistake of simply classifying a mortgage payment to the mortgage interest expense category. Instead, each month’s payment must be split into its component parts (principal, interest, and escrow) as part of a multi-line journal entry. Furthermore, the breakdown of the payment components will change month to month as your loan balance decreases and the allocation between principal and interest adjusts. In the example below we’ll show you the accounts you’ll need to reference and a properly recorded mortgage payment.

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A SAMPLE MORTGAGE PAYMENT JOURNAL ENTRY

For this transaction, we’ll need to reference four accounts from our chart of accounts (learn more about setting up your chart of accounts). Three are listed on the partial balance sheet below, and the fourth is the mortgage interest expense account.

Assets  Liabilities Checking Account$6,000Mortgage Loan Account$90,000Mortgage Escrow Account$1,000  

In this example, our monthly mortgage payment is $750, which is withdrawn from the checking account. Breaking down this month’s payment, $200 is deposited to the mortgage escrow account, $375 covers the interest due, and $175 is applied to the principal balance of the loan. For your loan, the payment component breakout should be available on your bank’s website for the payments you have made.

The journal entry for our sample mortgage payment is:

Debits Credits Mortgage Escrow Accout$200Checking Account$750Mortgage Interest Expense$375  Mortgage Loan Account$175  

After this transaction, net income has decreased by $375 because of the mortgage interest expense, and the new balance sheet account balances are:

Assets  Liabilities Checking Account$5,250Mortgage Loan Account$89,825Mortgage Escrow Account$1,200  

CONCLUSION

As you can see, properly recording a mortgage payment touches multiple balance sheet accounts as well as the income statement. The transaction to record mortgage payments also changes month to month as the interest expense decreases and principal repayments increase. When entering payments, you’ll want to use the information available on your bank’s website listing the different payment components. Using the template above and the correct component amounts, you should be able to create journals in your accounting system to accurately input these transactions. Alternatively, use the links below to learn more REI Hub and let us help you simplify the bookkeeping for your rentals. Thanks for reading!