Glysten Books · Guide
Recording a rental property mortgage payment
One payment to the lender is really three things: principal, interest and, often, escrow. Each goes to a different place in the books.
What a payment is made of
- Principal pays the loan down. It reduces the mortgage, which is a liability on the balance sheet.
- Interest is the cost of borrowing. It is an expense on the property's profit and loss.
- Escrow, when the lender collects it, is money held for property taxes and insurance. It sits in an escrow account, an asset, until the lender pays those bills.
The entry, with example figures
A $2,000.00 payment made up of $600.00 principal, $1,100.00 interest and $300.00 escrow is recorded like this:
| Account | Debit | Credit |
|---|---|---|
| Mortgage payable (liability) | 600.00 | |
| Mortgage interest (expense) | 1,100.00 | |
| Escrow (asset) | 300.00 | |
| Checking | 2,000.00 |
The figures are an example. The real split comes from the lender's statement.
Why the books drift from the lender
The split changes every month, because interest is charged on a balance that keeps falling. Recording every payment with last month's split, or guessing, leaves the loan balance in the books a little off the lender's, and the difference grows. The lender's statement is the figure to match.
How Glysten Books does it
Set the loan up from four numbers printed on any loan statement: the loan type, the rate, the monthly principal-and-interest payment and the lender's balance on a date. If the loan has escrow, add the escrow balance too. Glysten Books estimates each month's interest from the balance and the rate, splits each payment, and at each statement makes a correcting entry so the books match the lender.