Join Early Retirement Today
Reply
 
Thread Tools Search this Thread Display Modes
Are you counting mortgage principal as an expense?
Old 04-26-2007, 11:07 PM   #1
Recycles dryer sheets
 
Join Date: Apr 2007
Posts: 193
Are you counting mortgage principal as an expense?

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,
__________________

__________________
skyline is offline   Reply With Quote
Join the #1 Early Retirement and Financial Independence Forum Today - It's Totally Free!

Are you planning to be financially independent as early as possible so you can live life on your own terms? Discuss successful investing strategies, asset allocation models, tax strategies and other related topics in our online forum community. Our members range from young folks just starting their journey to financial independence, military retirees and even multimillionaires. No matter where you fit in you'll find that Early-Retirement.org is a great community to join. Best of all it's totally FREE!

You are currently viewing our boards as a guest so you have limited access to our community. Please take the time to register and you will gain a lot of great new features including; the ability to participate in discussions, network with our members, see fewer ads, upload photographs, create a retirement blog, send private messages and so much, much more!

Re: Are you counting mortgage principal as an expense?
Old 04-27-2007, 04:33 AM   #2
Recycles dryer sheets
 
Join Date: Jul 2006
Posts: 151
Re: Are you counting mortgage principal as an expense?

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

__________________
Hellbender
hellbender is offline   Reply With Quote
Re: Are you counting mortgage principal as an expense?
Old 04-27-2007, 05:06 AM   #3
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
 
Join Date: Jul 2005
Posts: 5,414
Re: Are you counting mortgage principal as an expense?

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?
__________________
mathjak107 is offline   Reply With Quote
Re: Are you counting mortgage principal as an expense?
Old 04-27-2007, 05:27 AM   #4
Thinks s/he gets paid by the post
saluki9's Avatar
 
Join Date: Feb 2005
Posts: 2,032
Re: Are you counting mortgage principal as an expense?

Quote:
Originally Posted by 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?
If you regularly deposit money into mutual funds and they lose value do you consider that an investing expense?

__________________
saluki9 is offline   Reply With Quote
Re: Are you counting mortgage principal as an expense?
Old 04-27-2007, 05:56 AM   #5
Full time employment: Posting here.
 
Join Date: Mar 2005
Posts: 699
Re: Are you counting mortgage principal as an expense?

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.
__________________
bpp is offline   Reply With Quote
Re: Are you counting mortgage principal as an expense?
Old 04-27-2007, 06:05 AM   #6
Thinks s/he gets paid by the post
BUM's Avatar
 
Join Date: Feb 2004
Location: Mid Hudson Valley
Posts: 1,778
Re: Are you counting mortgage principal as an expense?




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.

__________________
In a panamax down by the river.
BUM is offline   Reply With Quote
Re: Are you counting mortgage principal as an expense?
Old 04-27-2007, 06:38 AM   #7
Recycles dryer sheets
 
Join Date: Jan 2007
Posts: 207
Re: Are you counting mortgage principal as an expense?

"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."
__________________
Can eat with either hand.
Joss is offline   Reply With Quote
Re: Are you counting mortgage principal as an expense?
Old 04-27-2007, 07:09 AM   #8
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
donheff's Avatar
 
Join Date: Feb 2006
Location: Washington, DC
Posts: 8,649
Re: Are you counting mortgage principal as an expense?

Quote:
Originally Posted by Joss

"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?
__________________
Every man is, or hopes to be, an Idler. -- Samuel Johnson
donheff is online now   Reply With Quote
Re: Are you counting mortgage principal as an expense?
Old 04-27-2007, 07:24 AM   #9
Thinks s/he gets paid by the post
walkinwood's Avatar
 
Join Date: Jul 2006
Location: Denver
Posts: 2,677
Re: Are you counting mortgage principal as an expense?

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.
__________________
walkinwood is offline   Reply With Quote
Re: Are you counting mortgage principal as an expense?
Old 04-27-2007, 08:48 AM   #10
Thinks s/he gets paid by the post
saluki9's Avatar
 
Join Date: Feb 2005
Posts: 2,032
Re: Are you counting mortgage principal as an expense?

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.

__________________
saluki9 is offline   Reply With Quote
Re: Are you counting mortgage principal as an expense?
Old 04-27-2007, 09:07 AM   #11
Give me a museum and I'll fill it. (Picasso)
Give me a forum ...
kcowan's Avatar
 
Join Date: Jul 2006
Location: Pacific latitude 20/49
Posts: 5,739
Send a message via Skype™ to kcowan
Re: Are you counting mortgage principal as an expense?

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.
__________________
For the fun of it...Keith
kcowan is offline   Reply With Quote
Re: Are you counting mortgage principal as an expense?
Old 04-27-2007, 09:08 AM   #12
Thinks s/he gets paid by the post
jIMOh's Avatar
 
Join Date: Apr 2007
Location: Milford, OH
Posts: 2,085
Re: Are you counting mortgage principal as an expense?

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.
__________________
Light travels faster than sound. That is why some people appear bright until you hear them speak. One person's stupidity is another person's job security.
jIMOh is offline   Reply With Quote
Re: Are you counting mortgage principal as an expense?
Old 04-27-2007, 09:17 AM   #13
Recycles dryer sheets
 
Join Date: Jun 2006
Posts: 133
Re: Are you counting mortgage principal as an expense?

Quote:
Originally Posted by 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,
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" .
__________________
rw86347 is offline   Reply With Quote
Re: Are you counting mortgage principal as an expense?
Old 04-27-2007, 09:44 AM   #14
Thinks s/he gets paid by the post
nun's Avatar
 
Join Date: Feb 2006
Posts: 4,836
Re: Are you counting mortgage principal as an expense?

Quote:
Originally Posted by jIMOh
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
__________________
“So we beat on, boats against the current, borne back ceaselessly into the past.”

Current AA: 65% Equity Funds / 20% Bonds / 7% Stable Value /3% Cash / 5% TIAA Traditional
Retired Mar 2014 at age 52, target WR: 0.0%,
Income from pension and rent
nun is offline   Reply With Quote
Re: Are you counting mortgage principal as an expense?
Old 04-27-2007, 12:54 PM   #15
Thinks s/he gets paid by the post
 
Join Date: Aug 2005
Posts: 2,056
Re: Are you counting mortgage principal as an expense?

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.
__________________
Andre1969 is offline   Reply With Quote
Re: Are you counting mortgage principal as an expense?
Old 04-27-2007, 01:16 PM   #16
Thinks s/he gets paid by the post
saluki9's Avatar
 
Join Date: Feb 2005
Posts: 2,032
Re: Are you counting mortgage principal as an expense?

Quote:
Originally Posted by 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!
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!

__________________
saluki9 is offline   Reply With Quote
Re: Are you counting mortgage principal as an expense?
Old 04-27-2007, 01:17 PM   #17
Thinks s/he gets paid by the post
wabmester's Avatar
 
Join Date: Dec 2003
Posts: 4,459
Re: Are you counting mortgage principal as an expense?

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.
__________________
wabmester is offline   Reply With Quote
Re: Are you counting mortgage principal as an expense?
Old 04-27-2007, 01:29 PM   #18
Thinks s/he gets paid by the post
 
Join Date: Aug 2005
Posts: 2,056
Re: Are you counting mortgage principal as an expense?

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!
__________________
Andre1969 is offline   Reply With Quote
Re: Are you counting mortgage principal as an expense?
Old 04-27-2007, 01:31 PM   #19
Moderator
bssc's Avatar
 
Join Date: Dec 2005
Posts: 9,936
Re: Are you counting mortgage principal as an expense?

I see it as an expense item but I also see it as decrease in the mortgage balance item.
__________________
Angels danced on the day that you were born.
bssc is offline   Reply With Quote
Re: Are you counting mortgage principal as an expense?
Old 04-27-2007, 02:16 PM   #20
Thinks s/he gets paid by the post
SecondCor521's Avatar
 
Join Date: Jun 2006
Location: Boise
Posts: 2,405
Re: Are you counting mortgage principal as an expense?

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
__________________

__________________
"At times the world can seem an unfriendly and sinister place, but believe us when we say there is much more good in it than bad. All you have to do is look hard enough, and what might seem to be a series of unfortunate events, may in fact be the first steps of a journey." Violet Baudelaire.
SecondCor521 is offline   Reply With Quote
Reply

Tags
mortgage


Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)
 
Thread Tools Search this Thread
Search this Thread:

Advanced Search
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is On
HTML code is Off
Trackbacks are Off
Pingbacks are Off
Refbacks are Off


Similar Threads
Thread Thread Starter Forum Replies Last Post
Equity Is Altering Spending Habits and View of Debt Craig FIRE and Money 6 02-21-2009 01:25 PM
Mortgage payments after Early Retirement walkinwood FIRE and Money 19 04-28-2007 07:45 PM
Pay off the Mortgage at Retirement??? bbuzzard FIRE and Money 89 04-16-2007 08:01 AM
Paying off mortgage with an SPIA donheff Life after FIRE 5 12-19-2006 11:56 AM
Advice Needed - Taxable Invest vs Pre-Pay mortgage Trace Young Dreamers 5 09-14-2004 07:16 PM

 

 
All times are GMT -6. The time now is 10:07 AM.
 
Powered by vBulletin® Version 3.8.8 Beta 1
Copyright ©2000 - 2017, vBulletin Solutions, Inc.