Entering/Recording Mortgage payments (principal and interest)

LeaningTower

Looking for "best practice" to enter my mortgage payments. I didn't use Quicken's default method for my previous mortgage, and the way I set it up work adequately, but required some extra work (manual entries) every month. I'd like to improve on that system.

This is what I did and what I was/am trying to accomplish:

I think on the previous loan, Quicken by default categorized my payment as 1) a transfer from checking to my mortgage account for the principal portion, 2) mortgage interest expense 3) and.... I don't remember how it handled my escrow.

I think the main problem I had with the default method was that my principal, and possibly interest payments were not showing up in my expense/spending reports, or if they did, the principal showed up as both sides of a transfer (credit and a debit), netting the transaction out. I wanted to see those two amounts (P&I) in my spending reports as part of my cash flow.

I changed it accordingly:
1 & 2) I created mortgage:principal and mortgage:interest to categorize those amounts in my checking (spending) account.
To enable Quicken to properly calculate my monthly mortgage payments, I manually entered a transaction into the mortgage account every month equal to the current mortgage:principal. The mortgage account is not included in spending reports.

3) I entered the escrow as a transfer to my escrow account and eventually would enter the expense in the escrow account when the bank paid tax and insurance bills. Obviously, I included the escrow account in my spending reports. But it only affected the report when bills were actually paid, because the transfers net out.

I did not set up escrow on my new mortgage, so that is not an issue now.

Can anyone suggest a better and/or easier way to enter the mortgage payment every month that will include principal AND interest as expenses in my report and NOT require additional manual entries?

Thanks!

NotACPA

Your payment of the principal on a loan is NOT an expense.  An expense makes you poorer, but this is a transfer (at least the principal and escrow portions) and they don't reduce your net worth.  IF this was an expense, then it would be double-counting the acquisition cost of your home ... since the purchase, and taking out the loan, is the expense.

Your checking account is reduced (moves towards $0) but your mortgage debt is also reduced (likewise, moves towards $0).  And your escrow payments are merely moving money from your checking account "pocket" to your escrow "pocket".  Just as moving your wallet from one pocket of your jeans to another doesn't reduce your net worth.

How to record your escrow deposits in the split payment transaction depends upon which product year of Q you're running.  Older product years required that line 3 of the payment split be another transfer to the mortgage account ..... even if the amount of this split line was $0, it had to be there with escrow/etc starting on line 4.  Newer Q product (including the current Subscription product) don't have this restriction.

And, if you want to see where that money is going ... look at a Cash Flow report instead of an Income/Expense report.

LeaningTower

Thanks for the info. I had read in previous questions on the subject that the payment of principal is a transfer, not an expense (as you said), and perhaps that is part of the problem I have. As someone who is not well-versed in GAAP, I view the payment of principal as an expense b/c it comes from salary and reduces my available cash to spend. (Apparently, accountants do not view this as an expense, but the general population would.)

the escrow is moot, however. As I said in the original post, on the old loan, I recorded that as a transfer (as you advise), But I do not have an escrow account with my new mortgage.

Perhaps a cash flow report is better suited to the information I am trying to summarize/analyze/record, as you suggest. Can you describe the distinction between a cash flow report and an income and expense report? Aside from this example (principal) what info is captured in one but not the other?

NotACPA

A cash flow report shows transfers such as your mortgage principal (and other such transfers).  It  shows where money came from and where it went.

An Income/Expense report only shows Income (something that makes you wealthier) and Expenses (something that makes you poorer). But not transfers, which do neither.

In accounting there are 4, and only 4, types of "ledgers": Income, Expense, Asset and Liability.  A transfer is none of these.  Quicken adheres to these rules (although they fudge on a few other accounting rules).

LeaningTower

Thanks. Been using Q for several years, even read one Quicken book to get started, and just learned that Q follows those rules. About the only thing I remember from my college accounting classes is: Assets - Liabilities = Owner's Equity and debits are entries on the left side of an account and credits are on the right side. And either can represent an increase or decrease depending on which account it's in.

I wish Quicken provided a little more info in their help pages. A lot of things would be easier for non-accounting pros with some simple graphics depicting how Q treats transactions as double-entry bookkeeping.