Mortgage Loan Payment
Quicken wants to know the P & I part of your loan payment and then other
amounts. My question is on the other amounts.
Should I have accounts or categories for property taxes, homeowners
insurance FHA insurance, etc? All these are paid by the inpound account
but I have no idea if I should be tracking them and reconciling them.
Anyone know the proper way to do this?
There are 2 ways to account for impounded (or escrowed) expenses.
The first is to set up an account to hold the escrow funds. Each loan
payment will be split into interest (expense), principle (transfer to loan
account), and escrow (transfer to escrow account). Then when your bank sends
you an escrow statement, you can post the expenses (taxes, insurance, etc.)
in the escrow account.
The first way also corresponds to the tax rules for deducting your property
tax. That is, you can't deduct the amount you've paid INTO the escrow
account each year because it is still your money until it has been paid to
the county or other taxing authority. Only when the mortgage company - as
YOUR agent - makes the payment from your escrow account to the government
entity do you get your deduction. And if you've paid in $2,400 ($200 per
month) but the tax bill turns out to be just $2,350, then $2,350 is all you
can deduct in the year it is paid out of escrow.
The other way to do this, is to NOT set up the escrow account, and just have
each monthly loan payment include 1/12 of the annual insurance and tax
payments. In this case each payment would have: interest (expense),
principle (transfer to loan account), monthly tax (expense); monthly
insurance (expense).
The first way is more accurate, the second way involves fewer accounts,
reconciliations, and transfers.