A mortgage is a promissory note secured by an asset whose title is pledged to the lender. It is a form of long-term liability. Mortgages are generally are payable in equal installments consisting of interest and principal. To demonstrate the accounting procedures, suppose that on 2 January 2019, Grant Corporation purchases a small building for $1 million and makes a down payment of $200,000. The mortgage is payable over 30 years at a rate of $8,229 monthly. The annual interest rate is 12%, and the first payment is due on 1 February 2019. The journal entry to record the purchase of the building is as follows: Therefore, in February, the interest is $8,000 (or $800,000 x 1%) and the principal portion of the payment is thus $229 (or $8,229 - $8,000). In March, the interest is $7,998 (or 1% of $799,771), and this pattern continues monthly. The journal entry for February 2019 is presented as follows: The remaining portion is, of course, classified as a long-term liability.Mortgage Payable: Definition
Accounting Procedures
Journal Entries to Record Mortgage Payable
Subsequent entries are based on dividing the monthly payment of $8,229 between principal and interest. A mortgage amortization table can be used for this purpose, and such a table for the first 5 months of 2019 is shown as follows:
Each month, the total payment of $8,229 is divided into interest and principal. The interest is based on 1% (12% / 12 months) of the note's carrying value at the beginning of the month.
Since most mortgages are payable in monthly installments, the principal payments for the next 12 months after the balance sheet date must be shown in the current liability section as a current maturity of long-term debt.
Mortgage Payable FAQs
An installment loan will have equal monthly payments until full repayment of the balance. A mortgage has varied monthly payments over its life based on amortization tables.
Almost anything could serve as collateral for a mortgage contract; however, most lenders prefer real estate or business equipment to personal property. The main requirement is that there must be security attached to the property—either an item of value or an equity interest in the company.
There are several advantages to borrowing against property, including tax savings and risk reduction. Since the bank is the legal owner of the asset until it is fully repaid, you retain all other rights of ownership, including control of the property.
If a borrower fails to make his or her mortgage payment, the lender has several options available to collect on its investment. The least desirable alternative is foreclosure—a legal process that transfers ownership of real estate from a debtor to a creditor when an owner defaults on a loan secured by the property.
Since mortgages are loans that involve financing for properties, borrowers typically cannot cancel their agreements before it expires. However, early repayment is usually allowed--with an associated penalty fee
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
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