Breaking a Mortgage Down

• When you account for a mortgage in your budget or personal balance sheet, you must consider each of its components separately. Your equity, or the portion of the home you own from making a down payment and paying down the principal loan balance, is an asset. This means you can convert it into cash, using a second mortgage. The outstanding balance of your mortgage is a liability, or a long-term debt obligation. Liabilities reduce your net worth, while assets increase it. If you fell behind on your mortgage, or your home's value falls, the value of your liability rises and the value of your asset falls.
  
  

Amortization Accounting

• Amortization accounting is a method for accounting for a loan that reduces over time as you make payments, which is the case with a mortgage. Each month, as you pay down the principal, your interest charge is lower. This means that a larger portion of your payment goes toward the principal for the following month. You can produce a mortgage amortization accounting chart by calculating the interest and principal payment amounts on the first day of each month for the life of your mortgage loan. This allows you to chart your equity and calculate your remaining liability.
  
  

Calculations

• The basic calculation to account for a mortgage involves your interest rate and the principal balance of the loan. Since your interest rate is an annual rate, divide it by 12 to determine the monthly rate. Multiply this number by the principal balance of your loan to determine the first month's interest payment. The remainder of your first monthly payment (the full payment amount minus the interest payment) is a residual principal payment. A full amortization chart features rows for each month in the term of the loan and columns for interest payment and principal payment.
  
  

Considerations

• Financial websites often include mortgage calculators, which are software tools that allow you to build amortization charts by entering the terms of your loan. These calculators also allow you to see the impact of factors such as missed payments, late fees or interest rate changes. Your amortization chart only applies to your current interest rate, which means that if your interest rate rises, as with an adjustable rate mortgage, your accounting will still show an accurate schedule for paying off the principal, but higher interest charges will mean higher monthly bills.