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.

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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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.

In this example, our monthly mortgage payment is $750, which is withdrawn from the checking account.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: