Are you counting mortgage principal as an expense?

[skyline]

Sorry to pile onto to the frequently discussed mortgage threads out there, but, I couldn't find any prior threads that match this topic (I'm sure this must be an old one, but I couldn't find one)

My mortgage payment is roughly 65% principal - any thoughts from the masses as to whether the principal portion should count as part of my monthly expenses? I see it as a transfer payment of sorts, from my cash/bond account to my real estate account, and don't count it as expenses.

Any arguments for why it should count as an expense?

Cheers,

 

[hellbender]

Paying mortgage principal does not result in a decrease in equity. Such payments therefore do not constitute an expense.

 

[mathjak107]

paying principal on a residence should still be counted as an expense as you have to pay it. suppose you pay off the mortgage and the home is worth less than you paid?

 

[saluki9]

paying principal on a residence should still be counted as an expense as you have to pay it. suppose you pay off the mortgage and the home is worth less than you paid?

If you regularly deposit money into mutual funds and they lose value do you consider that an investing expense?

 

[bpp]

I account for mortgage principle payments as a transfer from my bank account into home equity. Additionally, I depreciate the home equity a little bit each month.

 

[BUM]

Accounting 101

The principal portion of your payment is not an expense because the funds received from the lending institution is not income.

But, yeah you still have to repay it.

 

[Joss]

"My mortgage payment is roughly 65% principal - any thoughts from the masses as to whether the principal portion should count as part of my monthly expenses? I see it as a transfer payment of sorts, from my cash/bond account to my real estate account, and don't count it as expenses."

"Any arguments for why it should count as an expense?"


Uh - because you have to pay it?

OK - I feel like a third grader that stumbled into a group of "big kids".... but how beneficial is an "accountant level" perspective on this?

I'm still way down there thinking "I got this much coming in... and only that much going out. Yep. Still good."

 

[donheff]

"Any arguments for why it should count as an expense?"


Uh - because you have to pay it?

OK - I feel like a third grader that stumbled into a group of "big kids".... but how beneficial is an "accountant level" perspective on this?

I'm still way down there thinking "I got this much coming in... and only that much going out. Yep. Still good."

Yeah. Who the hell cares whether this is technically an "expense" or an "exchange" or nothing at all. You need income or returns sufficient to cover the principal or you are in trouble, period. If you can't afford to pay it what are you going to do, take out a HELOC?

 

[walkinwood]

Isn't this is a cash-flow issue?

If you're thinking of how much cash-flow you require, you need to include your full mortage payment - principal+interest.

 

[saluki9]

As far as I know the OP doesn't need to report his statements in GAAP to anybody.

That being said, as far as cash flow is concerned equity is an expense because you need to come up with it every month.

From a balance sheet perspective it's just moving money from one account to another.

 

[kcowan]

I would consider the principal repayment component to be forced savings like a DRIP or pension contribution. It has to be a part of the budget but hopefully will result in increased equity just like those other payments.

 

[jIMOh]

it's an expense in that you have to pay it. From a networth standpoint, the payment actually increases your networth.

So if you have a balance statement for networth, in those terms, I do not see the mortgage as a payment, more like a transfer of an asset in one account to an asset in another account.

 

[rw86347]

Sorry to pile onto to the frequently discussed mortgage threads out there, but, I couldn't find any prior threads that match this topic (I'm sure this must be an old one, but I couldn't find one)

My mortgage payment is roughly 65% principal - any thoughts from the masses as to whether the principal portion should count as part of my monthly expenses? I see it as a transfer payment of sorts, from my cash/bond account to my real estate account, and don't count it as expenses.

Any arguments for why it should count as an expense?

Cheers,

I keep a detailed list of "cost of living" I define cost of living as the *require* money outlay if I lost my job today. I fully expect to have the house paid for before I quit my job. But it is easy to calculate my future C.O.L. by simply backing out the mortgage payment.

I also keep track of what I call my "personal P/E ratio" It is my Passive income over my Expences (COL). Today my PE ratio is "0.1" as soon as I finish paying off my house and rental, I will have a PE of "1.0" .

 

[nun]

From a networth standpoint, the payment actually increases your networth.

Surely the payment is "networth neutral", its the paycheck that increases your networth.

My mortgage payment is 60% principal and all I know is its nice to see the amount I owe go
down noticeably with every statement. I look at the principal part of the mortgage as a saving
account

 

[Andre1969]

I would consider the mortgage principal to be an expense. After all, you DO have to pay it every month. You can't just send in the interest portion! Well, unless it's an HELOC! While it can also be looked at as just a transfer of funds, because you're just moving the principal money from a checking account or whatever to equity in your home, you only see the benefit of that equity IF you sell the house!

So, it's an expense in the sense that it's something that you MUST pay and budget for every month. But looking at it from a balance sheet perspective, it doesn't affect your net worth.

 

[saluki9]

I would consider the mortgage principal to be an expense. After all, you DO have to pay it every month. You can't just send in the interest portion! Well, unless it's an HELOC! While it can also be looked at as just a transfer of funds, because you're just moving the principal money from a checking account or whatever to equity in your home, you only see the benefit of that equity IF you sell the house!

Should I consider my 401(k) contributions and expense too?

Afterall, I can only change them once a year, and I have to 1.quit my job 2. pay a penalty and 3. pay income taxes to get the money. talk about an expense!

 

[wabmester]

I don't consider paying myself to be an expense, but a better question might be how to handle your mortgage payment for planning purposes with FIREcalc.

FIREcalc doesn't have an amortization calculator. It also doesn't understand that the principal payment comes back to you, or that the interest payment doesn't go up with inflation.

So, you probably want to exclude your entire mortgage payment from the "expense" entry in FIREcalc, and use the non-inflation-adjusted "increase withdrawals" field for your average interest payment over the remaining life of your mortgage.

 

[Andre1969]

Should I consider my 401(k) contributions and expense too?

Afterall, I can only change them once a year, and I have to 1.quit my job 2. pay a penalty and 3. pay income taxes to get the money. talk about an expense!


Well if you're locked into it for a year, then I'd consider it an expense for the time being. My 401k gives me a little more flexibility than that. If I wanted, I could go online and stop the contributions almost immediately. At the most, I'd only put in for one more pay period.

But, similar to your house, where you don't see the money until you sell it, you don't see the money from your 401k until you start tapping it!

 

[bssc]

I see it as an expense item but I also see it as decrease in the mortgage balance item.

 

[SecondCor521]

Mortgage principal is not an expense, but it is a use of cash.

I'm only marginal at accounting, but the difference between the two ideas is behind the reason that companies have both an Income Statement and a Statement of Cash Flows. The Income Statement will show real income (like your paycheck) and real expenses (like the interest payment on your mortgage). The Statement of Cash Flows will show how cash was actually generated and used. It all reconciles quite nicely if you take the time to bend your mind around it all.

Depreciation is an expense, but is not a use of cash.

Interest expense on your mortgage is both an expense and a use of cash.

2Cor521

 

[mathjak107]

Should I consider my 401(k) contributions and expense too?

Afterall, I can only change them once a year, and I have to 1.quit my job 2. pay a penalty and 3. pay income taxes to get the money. talk about an expense!

a home is a consumption item like art work on my wall or jewelry i wear . until the day comes it stops being a consumption item and can be converted to cash and spendable i dont count home equity in any of my financial calulations other than the bottom line for estate taxes. . since some may never sell there home or if they do they may spend as much on a new home counting home equity may be irrelevent . it just depends why you are counting it.

 

[skyline]

I don't consider paying myself to be an expense, but a better question might be how to handle your mortgage payment for planning purposes with FIREcalc.

FIREcalc doesn't have an amortization calculator. It also doesn't understand that the principal payment comes back to you, or that the interest payment doesn't go up with inflation.

So, you probably want to exclude your entire mortgage payment from the "expense" entry in FIREcalc, and use the non-inflation-adjusted "increase withdrawals" field for your average interest payment over the remaining life of your mortgage.

I'm realizing based on the feedback that the biggest factor I need to consider is whether or not I plan on eventually downsizing my house in order to recapture the 'savings' that I'm convincing myself of making. If I plan on living in my current house forever, then I would agree with the 'principal=expense' crowd and say that it is indeed an expense, but I am planning (although 20 or so years down the road) of moving to a lower cost locale and getting that principal back, so I guess I'll keep thinking of it as a non-expense.

However, I like wab's 'switzerland' response the best - it seems like the best way to model the situation within FIRECALC w/o caring about whether it is or isn't an expense, and I hadn't considered this previously. (I'm going to try it out right now)

Thanks y'all,

 

[aenlighten]

I account for it everywhere, balance, income, and cashflow. Principal and interest as an expense, Principal as an offsetting revenue gain. Principal as liability debt reduction and as an offsetting equity increase. (I use book value until sold.) Interest as an operating expense and principal as financing cash payment.