Marking mortgage payments as an expense

[Kevin Benton]

Not if you record it that way...  Any payment we make is both an asset and a
liability.  In this case, it's both an asset and a liability for both
parties.

In accounting terms, a mortgage is generally an expense for the borrower,
and generally an asset for the lender.  When the borrower makes a mortgage
payment, cash goes to principal reduction, interest payment, tax and
insurance escrows (if escrow accounts are used).  If you're trying to record
the entire mortgage payment as a liability, that's not completely true.  A
percentage of it goes toward returning the equity to the home (hopefully, an
increasing future asset on your part), decreasing the liability left in the
mortgage principal.  The rest goes to the lender, insurance company, and
government.

In my own mind, however, my personally owned home (mortgage or not) that I
use for my residence is a complete liability until I sell it.  Why?  No
matter what I do, my home does not put more money in my pocket than it takes
out until I sell it or rent it out.  Even if I rent it out, it's still a
liability until it produces more cash than it uses.  To me, an asset is
something that puts money in my pocket.  A liability is something that takes
money out of my pocket.  Rich people buy assets, poor people buy
liabilities, and middle class people buy liabilities they think are assets
(bigger homes, cars, boats, airplanes, etc).  (Sorry guys - I've been
reading too much "Rich Dad, Poor Dad" lately.  :)

To address this issue, I would consider doing this:

Mortgage Payment	        $(750)
Mortgage Principal         $100 (Your future asset, Unpaid balance is
lender's current & future asset)
Mortgage Interest          $525 (Your current liability, Lender's current
asset)
Mortgage Insurance Escrow   $50 (Insurance Co's asset, Lender's liability)
Housing Tax Escrow          $75 (Government's asset, Lender's liability)

Now - what's left?  If your equity was $n before the transaction, it's now
$n+$100, not $n+$750.  In order to do this effectively, you have to know how
much of your payment is actually going to principal reduction.  Is it
doable?  Yes.  Is it easy?  Not necessarily.  Lenders aren't consistent on
how they apply payments to loans.  How much of the payment goes toward
principal reduction depends on your contract terms (when the payment is
applied, the interest rate, the compounding, etc.).  If it were me doing it,
I would make a close approximation, then when the tax forms came back from
the lender at the end of the year, I'd adjust it to the real values.  If I
felt their calculation and mine were too far apart, I'd challenge them on
it.

What do you do about the escrow accounts?  As money is taken out of them,
you would have new line items (as handled by the lender since your escrow is
their liability)...

Mortgage Insurance Escrow Disbursement $(600)
Mortgage Insurance                      $600

Net result?  Over a year's time, you should have a net zero amount in your
escrow accounts, some money added to your future principal asset and some
taken away from your interest liability.  Reality, however, says that Escrow
accounts rarely balance out because many lenders don't handle the
computations properly.  (Yes, I know they can add, but they're lazy
sometimes and just get it close and charge us something close to the
difference next year.)

To figure these problems out, I often think of the balance sheets of
everyone involved.  Technically (even though it's not legal), we truly do
operate off multiple balance sheets even if we're not consciously aware of
it.  As you can see in the example above, your asset is someone else's
liability (even if they don't know it yet :).  Your liability is someone
else's asset.

Kevin Benton - PFA
kevinb at bentonfam.org


-----Original Message-----
From: Dale Alspach [mailto:alspach at math.okstate.edu]
Sent: Wednesday, January 29, 2003 8:57 PM
To: lduperval at videotron.ca
Cc: gnucash-user at lists.gnucash.org
Subject: Re: Marking mortgage payments as an expense 


I don't think you can. By expensing the mortgage payments you are
not decreasing the liability. To decrease the liability money has
to come from somewhere. You could trash the equity to do this but
this will throw off other standard accounting computations.

Dale Alspach
_______________________________________________
gnucash-user mailing list
gnucash-user at lists.gnucash.org
https://lists.gnucash.org/mailman/listinfo/gnucash-user