Mortgage payments can be complicated to unpack, but it's worth taking the time to split each payment into its component parts to ensure accurate reporting. While we plan to develop a tool to split and categorize mortgage payments automatically in the near future, the following guidelines will help you get this done correctly on your own.
Your Monthly Mortgage Payment
Most rental property mortgages are serviced by fixed monthly payments that include amounts for one or more of the following:
Private Mortgage Insurance (PMI) Escrow
Property Taxes Escrow
HOA Dues Escrow
If your loan is amortizing, the amount of principal and interest paid will vary every month. The balance of the payment is typically allocated to escrow accounts, from which your lender makes disbursements for various actual expenses like private mortgage insurance, property taxes, insurance, and HOA dues. These escrow payment amounts may be adjusted annually, but generally do not change throughout the year.
Categorize & Track Escrow Payments
The key point is that payments into escrow accounts are not actual expenses. They are merely cash transfers and should be categorized as negative figures under the "Transfers" category. If your lender then makes disbursements to you from these accounts, those disbursements should be categorized as positive amounts under the same "Transfers" categories to net out the balance. If you then make payments directly for PMI, insurance, or property taxes, those should be categorized as usual in the appropriate expense categories. These are real expenses that will then flow to your income statement and net cash flow report.
It's a bit more complicated when your lender pays PMI, property taxes, or insurance directly from your escrow accounts on your behalf. In this instance, you'll want to record the actual expense amount that your lender paid in the correct category (PMI, Insurance, Property Taxes, etc.) AND you'll also want to record a positive disbursement to whichever escrow account under "Transfers" your lender used to pay the actual expense. This will ensure that your escrow account balances are always in sync. Keep in mind that a negative balance in an escrow account is a good thing. That means you have funds sitting there in excess of what your lender has needed to pay actual expenses.
If a surplus balance in an escrow account is returned to you at the end of the year (or any other time), you'll simply record a positive transaction in the appropriate "Transfers" escrow account to keep the balance in sync. You won't record an actual "Income" transaction because you never classified these escrow payments as real "Expenses" in the first place. You're essentially just moving money around.
How To Split & Categorize Each Month
To accurately keep track of principal, interest, and escrows with Stessa, follow these simple steps once per month, making sure all are categorized as expenses (negative numbers):
Use the Split feature to break your mortgage payment into each of its component parts, based on the schedule you'll create below.
Categorize the principal amount as "Mortgages & Loans > Mortgage Principal"
Categorize the interest amount as "Mortgages & Loans > Mortgage Interest"
Categorize the PMI escrow amount as "Transfers > PMI Escrows"
Categorize the Insurance escrow amount as "Transfers > Insurance Escrows"
Categorize the Property Tax escrow amount as "Transfers > Property Tax Escrows"
Categorize the HOA Dues escrow amount as "Transfers > HOA Escrows"
Still Need Help Sorting Out Mortgage Payments?
If you're interested in having Stessa do the math for you and split your mortgage payments automatically, be sure to vote for this request and/or post a reply in the forums.
Be sure to read the other related help articles, including Mortgages & Loans: Add & Edit and How to Split & Merge Transactions. Use the blue circle at lower right to ask a question or send us feedback and suggestions!