Best Practices for Monthly Mortgage Payment

Austin@

I just bought my first house and am confused about the proper way to handle my monthly mortgage payments. I have set up my mortgage account as well as the checking account I pay from each month. I've set up the loan terms so it creates a scheduled transaction that includes principal, interest, extra principal, taxes, and insurance.

When I make my payment each month, the principal parts aren't considered expenses because they are set up as transfers into my mortgage account, which makes sense from an accounting standpoint.

However, what confuses me is this: if monthly principal payments are not considered expenses because they are technically transfers to a liability account, how do I actually record the expense of purchasing the home, aka the sales price (down payment + loan amount)?

I've created a category called "Home Purchase" and used this category for my down payment transaction, and I have tried to set my opening mortgage balance to this category as well so that (as far as reporting is concerned) that category reflects the purchase price of the home. However, the opening balance transaction in my mortgage account always reverts back to "Adjustment".

If the purchase price of the home is never recorded as an expense (because Quicken sets it to "Adjustment"), and monthly principal payments are considered transfers rather than expenses, doesn't that make it look like I never actually pay for the home, at least as far as reporting is concerned?

I'm hoping to get some advice from more experienced users as to how to best set up my mortgage and categorize everything so it is accurate and following best practices for how Quicken works as well as more general accounting principles.

Thanks in advance!

John_M

On the day you buy your home, you are essentially "buying" offsetting assets and liabilities. On the one hand, you create an asset (the house) and on the other you create a liability (the mortgage). Your down payment is the house value minus the mortgage amount. Both accounts are shown in the Property & Debt section of the sidebar.

The initial transaction should show transfers to both accounts. It may also have a transfer to an escrow account for taxes (this is set up in the Banking section as Cash or Savings). Expenses during closing often involve closing costs (attorneys fees, surveyor, etc.), a partial month's interest cost, and partial quarter's property tax.

You wrote a check at closing, probably to a bank or lawyer. Here are some made up numbers showing the splits:



In this case, you wrote a check for $47,200 to buy a $200,000 house.  This assumes a 20% downpayment of $40,000. This means that your mortgage is $160,000. There is no need to shown the down payment explicitly. The remainder of your $47,200 check is made up of the $1,000 transfer to the escrow account and $6,200 worth of expenses.

Each month your payment would then be split into three pieces (four if you make an extra principal payment): Principal, Interest, and transfer to Escrow.

Hope this helps. Oh, and congratulations on the house purchase!

Austin@

Thanks @John_M. I really appreciate the information. This has been incredibly helpful!

Austin@

@John_M, I notice you have the escrow amount set up as a transfer to a different account. If you don't mind me asking, what is the reasoning behind having a separate account that tracks the escrowed amount vs simply making the split lines have the expense categories of the escrowed items (in my case Property Taxes and Home Insurance)? Do you track your escrow balance in its own account and then when the lender pays out, record those transactions as categorized expenses in the escrow account rather than recording them as categorized expenses in the monthly mortgage payment scheduled transaction?

Also, I apologize if these are dumb questions. I'm new to all of this

John_M

Not a dumb question at all! One of the nice things about Quicken is its flexibility – you can set it up however it makes sense for you.

I would actually rather set up my monthly splits as you suggest, having the actual categories for taxes as part of the transaction (my bank lets me pay insurance directly). That way, I would have a more even monthly cash flow showing in my expense reports rather than taking the tax hit once a quarter.

The reason I have it this way is for several reasons:

• The bank debits amounts monthly, but pays taxes quarterly and the debits cross tax years. That is, the quarterly payment made on January 15 consists of the debits made November 1, December 1, and January 1. So, in order for my Quicken tax schedule to work out, I have the transaction for the actual tax payment made out of the escrow account. I have to count the January 15 tax payment in that tax year even though two of the debits for it were made in the preceding year.
• Another reason is that the bank doesn't actually debit the "real" amount of my taxes each month. It's always an estimate and they are allowed to keep several hundred dollars extra in the escrow account as a buffer. So, once a year the bank estimates a new monthly debit, but it will not actually be equal to the tax amount. Having the escrow account allows me to make sure that this buffer balance is correct. If I ever sell the house (or remortgage it) this is money that I will get back.
  
• Finally, because the escrow account has a buffer, the bank is required to give me interest on 12/31 of every year. Having the escrow account allows me to have a place to input this interest transaction, which I need to show on my income tax.

I think that most escrow accounts work the way I have described above, so you may find my method useful.

Austin@

@John_M thank you again for your amazing response! It has been so helpful and makes a lot of sense. I've now gotten everything with my home purchase, my mortgage, and my escrow account all set up correctly now and I think it'll be a great system.

One last question: What account type do you feel is most appropriate to use when setting up the escrow account? I set it up as a savings account, but I'm not sure if it would be more appropriate to set it up as an asset account or a cash account. It may not matter, but I'd love your input in case you've found a reason why one is more appropriate than the other.

John_M

I don't think it matters. I also have mine set up as a savings account. Cash would also be appropriate. I tend to think of asset accounts as more long-term, which is why I've got the escrow account in the Banking section rather than Property & Debt.

Good luck unpacking your boxes!