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
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 | $6,000 | Mortgage Loan Account | $90,000 |
| Mortgage 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In this example, our monthly mortgage payment is $750, which is withdrawn from the checking account.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 Account | $200 | Checking Account | $750 |
| Mortgage 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 | $5,250 | Mortgage Loan Account | $89,825 |
| Mortgage 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!
