Mortgage Payments with Escrow and Interest

Your mortgage setup is partially incorrect, as escrow is a Current Asset, not a sub-account of your Long Term Liability. Escrow represents money set aside on your behalf for future bills. Placing it under a liability causes debits (adding money) to mistakenly reduce your debt balance instead of building an asset balance. Interest is also an expense, not a liability sub-account.

Since mortgage arrangements can vary, it's always a good idea to consult an accounting professional to make sure everything aligns with your specific financial setup. Now, correcting this requires starting fresh by creating separate, independent accounts. Here is the recommended structure:

• Long Term Liability - Mortgage Principal (the principal balance)
• Expense account - Mortgage Interest (since interest is an expense, not a liability)
• Current Asset account - Escrow Account (separate, standalone, not under the mortgage)

Then, to record your monthly check split, write a single check from your checking account and divide it across three separate line items. First, the principal portion goes to your mortgage account to decrease what you owe. Next, the interest portion goes to your interest account to record the borrowing cost. Finally, the escrow portion goes to your escrow account to increase your held asset balance.

When property taxes are actually paid out of escrow, you'd record a separate transaction, typically a check or expense, debiting your property tax expense account and crediting (reducing) the escrow asset account.

We'll be right here if you have additional questions.