Author Topic: Categorizing Mortgage Payments: Spending or Savings?  (Read 17689 times)

JGB

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Categorizing Mortgage Payments: Spending or Savings?
« on: April 30, 2013, 11:43:42 AM »
In a typical month, around 20-25% of my income goes to my mortgage payment (of which I actually pay 115% to achieve a faster paydown). Where I get a bit confused is how to categorize that payment when interpretting spending vs savings.

Here are my current thoughts on the matter, but I'd like to get opinions on if I'm looking at it the wrong way:

Anything I pay toward interest is spending. Anything paid toward principle is savings. This seems like a straight-forward way to look at it, since I would ultimately be able to get the money paid toward principle back out by either selling the house or getting a home equity loan. Is that a legit way to look at the situation?

As recently as a week ago, I would have considered the extra-paydown portion (e.g. the extra 15%) as savings and the rest of the mortgage payment as spending, so that's one alternative.

Which way of looking at this is more accurate? Is there another, even better way?

Cecil

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Re: Categorizing Mortgage Payments: Spending or Savings?
« Reply #1 on: April 30, 2013, 11:52:46 AM »
> Anything I pay toward interest is spending. Anything paid toward principle is savings.

That's how I do it.

The interest is an actual cost - the cost of borrowing money.

The principal paydown is reducing my debt load, so it counts as savings the same way paying down a credit card or student loan would count as savings.

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Re: Categorizing Mortgage Payments: Spending or Savings?
« Reply #2 on: April 30, 2013, 12:19:56 PM »
The whole thing to me is spending.  But many (including MMM, if that matters) counts only the interest as spending.

To me it comes down to this: Plan your expenses for ER.  If you plan on paying off the whole mortgage before ER, don't count it at all (principal or interest), as it won't be an expense in ER.  If you plan on having the mortgage in ER, count both parts as spending, as both P&I will need to be in your budget.

I'm in the latter camp.
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Cecil

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Re: Categorizing Mortgage Payments: Spending or Savings?
« Reply #3 on: April 30, 2013, 01:15:37 PM »
arebelspy, good points.

I guess it comes down to what you are trying to calculate. Do you want to know a raw savings rate? Do you want to know how fast your net worth is increasing? Or do you want to know what your cashflow situation looks like? Depending on what you want to know, you'll categorize things differently.

Spork

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Re: Categorizing Mortgage Payments: Spending or Savings?
« Reply #4 on: April 30, 2013, 01:35:19 PM »
I guess I am in both camps...

Technically, I think interest (and taxes/insurance if that is part of it) is expense and principle goes towards "assets".   That's how I account for it (with the idea that home equity is an asset that is theoretically recoverable.)  In the past, I've used this to account for "net worth."

BUT...  in doing any calculations for ER, I only include "financial assets".  In other words, I ignore real estate*, automobiles, etc.  and only use bank/stock/bond/mutual funds/etc.  In other words, I still track net worth, but at some point I realized it isn't really part of the equation.

*The only real estate I have is my house/land, which is paid off.  I don't own any rentals.

Tyler

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Re: Categorizing Mortgage Payments: Spending or Savings?
« Reply #5 on: April 30, 2013, 01:37:43 PM »
I agree with Cecil.  It depends on what you're measuring.

From a net worth perspective, mortgage interest reduces it (spending) and principal is neutral (assuming your home value is stable).  You're basically shifting money from your bank account to your home equity account.  One may count new money they earned and immediately transferred into the house as savings, but if you were to pay off your entire mortgage tomorrow you basically made a money transfer, not "saved" anything in the traditional sense as your net worth will be unchanged. 

From a cash flow perspective, the entire payment is outflow (spending) since it reduces your liquid assets by that amount.  So I would heed Arebelspy's advice in retirement. Keep in mind that money transferred from investments to your home equity is considered spending from a Firecalc perspective.
« Last Edit: April 30, 2013, 01:41:02 PM by Tyler »

clutchy

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Re: Categorizing Mortgage Payments: Spending or Savings?
« Reply #6 on: April 30, 2013, 01:49:13 PM »
I consider it a current cost. 

You can always stop saving if you want but you can't stop paying the "savings" part of your mortgage.


I do keep a balance sheet separate from Mint and that incorporates the asset, debt and equity side of it.  Calling it savings is really not appropriate because it isn't savings it's equity.

maybe people are confusing it because they're only looking at their income statement?

icefr

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Re: Categorizing Mortgage Payments: Spending or Savings?
« Reply #7 on: April 30, 2013, 04:54:02 PM »
I count the mortgage principal pay down (including from extra payments and regular ones) in my savings rate since that's meant to be an indicator of how much *I* personally increased my net worth by that month.

On the other hand, I count the entire required payment as part of my expenses for the month and will do so until it's paid off in full.

So, I look at it multiple ways, depending on what I'm calculating.

Acadian

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Re: Categorizing Mortgage Payments: Spending or Savings?
« Reply #8 on: April 30, 2013, 05:05:05 PM »
I look at it all as spending unless I actually sell the house. In other words, if I buy a car for $10,000 (spending) and eventually sell it for $5,000 I would then consider that money as savings because I actually have the cash to use. Even a house can only be sold if there is a willing buyer and for a maximum price of whatever they are ready to pay for it.

travelbug

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Re: Categorizing Mortgage Payments: Spending or Savings?
« Reply #9 on: April 30, 2013, 05:42:37 PM »
I don't class mortgage expenses whether interest or principal as savings.

It is an expense in our system.

bdc

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Re: Categorizing Mortgage Payments: Spending or Savings?
« Reply #10 on: April 30, 2013, 09:52:39 PM »
For those who count principal payments as savings, do you count depreciation as an expense?  Or you just assume you're repairing-as-you-go, so any depreciation is captured by your repair costs?

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Re: Categorizing Mortgage Payments: Spending or Savings?
« Reply #11 on: May 01, 2013, 05:07:06 AM »
I guess I think of the principal as an investment, but I don't really calculate it as savings. It's a major reduction in what we'll have to spend in retirement, so it's all part of the plan, but really, it's a category of its own called "somewhere to live."

So far, we have only our primary residence and land, and the loan is on the land, actually, because the house we built ourselves with cash. I think of the house costs the same way as the principal on  the land. If/when we buy rental property, we'll probably think of it differently.

Interest on the land is pure unnecessary spending. In fact, we're considering paying it all off this month to cut out that spending.

Spork

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Re: Categorizing Mortgage Payments: Spending or Savings?
« Reply #12 on: May 01, 2013, 09:47:11 AM »
For those who count principal payments as savings, do you count depreciation as an expense?  Or you just assume you're repairing-as-you-go, so any depreciation is captured by your repair costs?

I guess I've never been in a real estate bind where I really suffered notable depreciation.  My homes have generally been stable or increased some amount.

For depreciating assets (cars, for example) I do count depreciation as an expense, but I'm not overly anal about it.  I make one pass through the auto values every year or 2 and bump them down (or occasionally up for my antique) to approximate value from kbb/edmunds.  It goes in as an expense in gnucash... though I don't really consider it an expense in the strictest sense of the word.  I tend to own cars a really long time.  While depreciation is a real thing... at 15+ years of ownership, it's small enough I don't worry about it so much.

On the other side of this: a portion of our savings is always pre-tagged with "car replacement".  It's not a huge amount, just a little put away every month or so.  We pre-allocate it such that when it comes time to get a replacement, there is near line cash to buy it now.

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Re: Categorizing Mortgage Payments: Spending or Savings?
« Reply #13 on: May 01, 2013, 10:24:39 AM »
I can't see how you could not consider principal payments as an investment. Especially when you are making additional principal payments.  You are buying an investment that pays out at the yield of the mortgage.  With interest rates in the 3%-3.5% range, I think that additional principal payments aren't the best way to invest, but it is definately the definition of an asset. The only way to get an asset is to invest. Without accounting it this way, there would be no difference between someone paying off a loan over 30 years, 15 years, 10 years, or less.  This doesn't make any sense.

On the mortgage payment side, everytime you make a mortgage payment, some portion of that is increasing your networth.  When you make a rent payment, none of the payment increases your networth.  If you plan on staying in your house forever, then you are investing more now so that you can reduce your housing expense in the future when your house is paid off.  If you plan on selling your house, you are building up your asset each month.

When discussing depreciation or appreciation, that is the same as any other investment.  If you buy a bad investment, it most likely will be worth less in the future. Historically, over long periods of time housing has increased in value over 15-30 years.  If you think we are entering a deflationionary environmetn then you should not buy any assets.  Renting is the way to go.  In the US, there are also many other tax benefits to owning. 

I see this as being similar to those who buy dividend stock vs. equity stock.  To me there are no differences.  Just because it is not kicking off dividends does not mean that it is not an asset or an appreciative asset.  If you have to sell a few shares each month to fund your life it is the same as a company sending you a dividend check each month or quarter. The only difference is that you have control over the former. 

clutchy

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Re: Categorizing Mortgage Payments: Spending or Savings?
« Reply #14 on: May 04, 2013, 01:54:19 PM »
I think everyone is conflating these to fit their own system and perhaps bump up their "savings rate" a bit which is fine if that's what you want to do.

Here's how you should properly account for your home and the payments you make to it.


I have a house.

It is worth $250k and I have a mortgage of $250k.  Net worth/equity?  ZERO.

I make a payment of $1000.  Of this $500 is interest and $500 is principal.

House;  still worth $250k mortgage?  $244.5k.  Net worth/equity?  $500
Interest expense is $500 which goes to your income statement.

The house is an asset and the amount in EXCESS of your mortgage(liability) is considered equity and contributes to your net worth.  This is your balance sheet.

You savings rate is an income statement approach.  What you make less what you spend.  Just because a % of what you spend goes into your asset category doesn't necessarily mean it should be considered as part of your "savings rate"  but that up to you i suppose.... it certainly does increase your net worth.





Spork

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Re: Categorizing Mortgage Payments: Spending or Savings?
« Reply #15 on: May 04, 2013, 05:58:38 PM »
I think everyone is conflating these to fit their own system and perhaps bump up their "savings rate" a bit which is fine if that's what you want to do.

Here's how you should properly account for your home and the payments you make to it.


I have a house.

It is worth $250k and I have a mortgage of $250k.  Net worth/equity?  ZERO.

I make a payment of $1000.  Of this $500 is interest and $500 is principal.

House;  still worth $250k mortgage?  $244.5k.  Net worth/equity?  $500
Interest expense is $500 which goes to your income statement.

The house is an asset and the amount in EXCESS of your mortgage(liability) is considered equity and contributes to your net worth.  This is your balance sheet.

You savings rate is an income statement approach.  What you make less what you spend.  Just because a % of what you spend goes into your asset category doesn't necessarily mean it should be considered as part of your "savings rate"  but that up to you i suppose.... it certainly does increase your net worth.

It's been a long time since I took accounting (and I didn't do that well, as I recall).  Don't take this as a snarky reply, but as a real question.

Let's say I get paid $1000.  I either:
1.  I pay $500 in bills and leave $500 in checking.
2.  I pay $500 in bills and put $500 in my Vanguard account
3.  I pay all $1000 towards my mortgage.  $500 is interest.  $500 is principle.

From a "savings" point of view, how do these differ?  I see it as "at the end of the month, $500 of my income went into one of my assets".  Therefore, I "saved" 50%.

Am I not seeing that correctly?

Spork

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Re: Categorizing Mortgage Payments: Spending or Savings?
« Reply #16 on: May 04, 2013, 06:56:58 PM »
Neither.

It's a transfer from the equity side of your balance sheet to the debt side.

This becomes very graphically clear when you use personal financial management software like MS Money.


For what it's worth: MS Money is a really good personal finance package.  It is, however, not very good at generally accepted accounting principles.

I'd be more interested how to account for it in the real world, where you have only: income, expense, asset, debt.

IMO savings percentage is:  (income - expense) / income * 100.   

Am I wrong?  Whenever you move from asset class to asset class (checking account to home equity, for instance) -- it isn't an expense.  That's what I remember... whether it is right or wrong.
« Last Edit: May 04, 2013, 07:18:03 PM by Spork »

clutchy

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Re: Categorizing Mortgage Payments: Spending or Savings?
« Reply #17 on: May 04, 2013, 10:48:20 PM »
I think everyone is conflating these to fit their own system and perhaps bump up their "savings rate" a bit which is fine if that's what you want to do.

Here's how you should properly account for your home and the payments you make to it.


I have a house.

It is worth $250k and I have a mortgage of $250k.  Net worth/equity?  ZERO.

I make a payment of $1000.  Of this $500 is interest and $500 is principal.

House;  still worth $250k mortgage?  $244.5k.  Net worth/equity?  $500
Interest expense is $500 which goes to your income statement.

The house is an asset and the amount in EXCESS of your mortgage(liability) is considered equity and contributes to your net worth.  This is your balance sheet.

You savings rate is an income statement approach.  What you make less what you spend.  Just because a % of what you spend goes into your asset category doesn't necessarily mean it should be considered as part of your "savings rate"  but that up to you i suppose.... it certainly does increase your net worth.

It's been a long time since I took accounting (and I didn't do that well, as I recall).  Don't take this as a snarky reply, but as a real question.

Let's say I get paid $1000.  I either:
1.  I pay $500 in bills and leave $500 in checking.
2.  I pay $500 in bills and put $500 in my Vanguard account
3.  I pay all $1000 towards my mortgage.  $500 is interest.  $500 is principle.

From a "savings" point of view, how do these differ?  I see it as "at the end of the month, $500 of my income went into one of my assets".  Therefore, I "saved" 50%.

Am I not seeing that correctly?


you're correct of course they're both assets I'm just playing with words.

Net worth in your house is a bit less liquid than assets in stock.  I think that's the distinction I'm trying to draw.  I thought of that when I initially posted it but then was like meh... most people don't care about accounting.

Ok I'm thinking about this more...  Paying down a mortgage doesn't make your asset worth anymore than it was before you paid it.  It does however reduce the debt and make more of the house "yours".

So I think I'll have to return to my original interpretation.  The principal portion of the mortgage is equity.

It's so difficult to illustrate these on a forum but let me try.

Income statement
-----------------------

Income++
Expense-
-----------
Net Income+
adds to equity


Balance Sheet
------------------
Assets+++
Liabilities--
Equity+


this is probably just becoming more and more confusing.
« Last Edit: May 04, 2013, 10:59:22 PM by clutchy »

Mr Mark

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Re: Categorizing Mortgage Payments: Spending or Savings?
« Reply #18 on: May 06, 2013, 10:51:10 PM »
I'd say it depends on where you live, and what your alternative is.

Housing is a special investment class, because you have to live somewhere.

You have a choice: rent a place to live (along with the pros and cons, control, stability, etc) or invest some of your stash and buy using borrowed money, and pay interest.

So I'd say the difference between the interest payment and the rental payment it replaces can be considered savings, plus, obviously, the contribution to equity by way of principal payments.

On the other side, the balance sheet, you're now a property investor! You own an asset, and have a corresponding fixed liability. This usually means you'll get some asset growth, but not always.....  Always part of a balanced portfolio kids.

dragoncar

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Re: Categorizing Mortgage Payments: Spending or Savings?
« Reply #19 on: May 07, 2013, 12:37:21 AM »
The principal payment is definitely savings.  Just like paying down your credit card debt is savings.

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Re: Categorizing Mortgage Payments: Spending or Savings?
« Reply #20 on: May 07, 2013, 07:36:31 AM »
I count the monthly mortgage payment as an expense.  Any extra money going towards mortgage paydown I consider savings.

cynthia1848

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Re: Categorizing Mortgage Payments: Spending or Savings?
« Reply #21 on: May 07, 2013, 08:40:07 AM »
What about the tax consequences?

We itemize and are able to deduct all of what goes to interest, so we pay less in taxes as a result.  It comes out as more of a wash that way, but I haven't figured out the exact numbers - I estimate we pay 30K in interest and as a result pay 20K less in taxes.

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Re: Categorizing Mortgage Payments: Spending or Savings?
« Reply #22 on: May 07, 2013, 10:55:15 AM »
The principal payment is definitely savings.  Just like paying down your credit card debt is savings.

Not too sure about that.

If I had $250,000 laying around, and used it to buy a house. I'd consider that spending, not saving.

Or how about this. Two scenarios.

Person A buys a 1000 dollar plasma TV with cash: Spending.
Person B uses a credit card to purchase a 1000 dollar plasma TV. Monthly payments on credit card 50 dollars: Spending or Savings?
« Last Edit: May 07, 2013, 10:58:38 AM by Dynasty »

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Re: Categorizing Mortgage Payments: Spending or Savings?
« Reply #23 on: May 07, 2013, 11:09:51 AM »
If I had $250,000 laying around, and used it to buy a house. I'd consider that spending, not saving.

Do you also consider investing in equities and bonds to be spending?  If not, why not?

Or how about this. Two scenarios.

Person A buys a 1000 dollar plasma TV with cash: Spending.
Person B uses a credit card to purchase a 1000 dollar plasma TV. Monthly payments on credit card 50 dollars: Spending or Savings?

The way I track my finances, the TV purchase is spending whether I pay in cash or credit.  Paying the credit card bill is savings because it removes a debt from my balance sheet.  Paying any interest on the debt would be spending.

As clutchy mentioned, looking at each transaction in terms of what it does to your net worth is a good way to separate spending and savings.

Spork

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Re: Categorizing Mortgage Payments: Spending or Savings?
« Reply #24 on: May 07, 2013, 12:13:08 PM »
The principal payment is definitely savings.  Just like paying down your credit card debt is savings.

Not too sure about that.

If I had $250,000 laying around, and used it to buy a house. I'd consider that spending, not saving.

Or how about this. Two scenarios.

Person A buys a 1000 dollar plasma TV with cash: Spending.
Person B uses a credit card to purchase a 1000 dollar plasma TV. Monthly payments on credit card 50 dollars: Spending or Savings?

I wouldn't compare a house -- which is an arguably stable asset -- to a plasma TV.  The TV is a rapidly depreciating asset -- and I use asset loosely there.

If I have $250k in savings and I spend it on a house that is worth $250k, I'd say that's neither savings nor expense.  It's trading one asset class for another.  Closing costs, taxes, etc -- that  is an expense.

As MrSaturday points out... it's similar to buying stocks/bonds.   It might not be as liquid, but it's similar.

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Re: Categorizing Mortgage Payments: Spending or Savings?
« Reply #25 on: May 07, 2013, 12:56:21 PM »

I wouldn't compare a house -- which is an arguably stable asset -- to a plasma TV.  The TV is a rapidly depreciating asset -- and I use asset loosely there.

If I have $250k in savings and I spend it on a house that is worth $250k, I'd say that's neither savings nor expense.  It's trading one asset class for another.  Closing costs, taxes, etc -- that  is an expense.

As MrSaturday points out... it's similar to buying stocks/bonds.   It might not be as liquid, but it's similar.
Trading asset classes I agree. But,

A house is a depreciating asset (like the plasma TV). Ever go house shopping and set foot into a home that hasn't had a thing done to it in 30 years? And then start thinking how many tens of thousands of dollars it is going to cost to fix this place? Needs new furnace. House needs repainted. Gonna need a new roof in 5 years. Old appliances. Some of the plumbing needs replaced, etc.  And then there are the cosmetic fixes. 

Generally homes match the pace of inflation, assuming the homeowner maintains the home, which over the course of the homes lifetime is about 2% a year of property value. And well above that once you start doing cosmetic changes. Only some of which will result in a greater sales price. Some remodels will lower the value.

The underlying land on which a home is situated, on the other hand, is a stable asset. But there are assumptions there as well.

The take away is if you want lots of money, real estate for most people is a lousy way to spend, save, invest, asset transfer, or any other word you want to use to describe spending money on.   But you do need somewhere to live regardless if you rent from a landlord, or rent money from the bank. 

Thus to me, a home is an expense.  Just like paying a credit card bill. Because if you hadn't used your credit card to purchase anything to begin with, you wouldn't have to pay it off. A credit card bill is delayed spending! Not saving.

Dynasty

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Re: Categorizing Mortgage Payments: Spending or Savings?
« Reply #26 on: May 07, 2013, 01:00:19 PM »

Do you also consider investing in equities and bonds to be spending?  If not, why not?

I consider it to be investing.

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Re: Categorizing Mortgage Payments: Spending or Savings?
« Reply #27 on: May 07, 2013, 01:22:38 PM »

I wouldn't compare a house -- which is an arguably stable asset -- to a plasma TV.  The TV is a rapidly depreciating asset -- and I use asset loosely there.

If I have $250k in savings and I spend it on a house that is worth $250k, I'd say that's neither savings nor expense.  It's trading one asset class for another.  Closing costs, taxes, etc -- that  is an expense.

As MrSaturday points out... it's similar to buying stocks/bonds.   It might not be as liquid, but it's similar.
Trading asset classes I agree. But,

A house is a depreciating asset (like the plasma TV). Ever go house shopping and set foot into a home that hasn't had a thing done to it in 30 years? And then start thinking how many tens of thousands of dollars it is going to cost to fix this place? Needs new furnace. House needs repainted. Gonna need a new roof in 5 years. Old appliances. Some of the plumbing needs replaced, etc.  And then there are the cosmetic fixes. 

Generally homes match the pace of inflation, assuming the homeowner maintains the home, which over the course of the homes lifetime is about 2% a year of property value. And well above that once you start doing cosmetic changes. Only some of which will result in a greater sales price. Some remodels will lower the value.

The underlying land on which a home is situated, on the other hand, is a stable asset. But there are assumptions there as well.

The take away is if you want lots of money, real estate for most people is a lousy way to spend, save, invest, asset transfer, or any other word you want to use to describe spending money on.   But you do need somewhere to live regardless if you rent from a landlord, or rent money from the bank. 

Thus to me, a home is an expense.  Just like paying a credit card bill. Because if you hadn't used your credit card to purchase anything to begin with, you wouldn't have to pay it off. A credit card bill is delayed spending! Not saving.

Maybe I'm an exception.  I've never sold a house for less than I paid for it.  It's always been about the pace of inflation with one exception that was a decent rise.  And whether it is a good investment or not is really irrelevant here.  You can buy a CD that pays less than the cost of inflation.  That doesn't make the CD an expense.  It's just a bad investment.  Even worse than the house: you can't live in it.

HOWEVER.... I did have to do maintenance.  One house in particular required A LOT of maintenance.  And that *IS* an expense.  Re-working, redecorating, etc... all expense.   Taxes, interest, closing costs, realtor fees -- expenses.

(And I categorize ALL credit card bills as expenses... I won't argue with you there.  There's nothing I ever buy with one that I'd categorize as an "asset").

I think we're quibbling over semantics a bit.  Maybe part of the problem is that I use gnucash and it forces you to categorize things as income/expense/assets/liabilities.  From my (vague) memories of accounting, that's actually correct.  But school was many years and many beers ago.

EDIT:  one last stab to illustrate why I'd not categorize it as expense:  rent vs buy.  A rental is 100% expense.  A purchase is a mix of expense (financing, maintenance, taxes, etc) and savings in the form of asset transfer (principle).  That doesn't mean buying is better/cheaper... it just means you can sell it and (theoretically) get your equity back.  You might not get 100% ... but the same is true if you bought shares of Facebook stock when it IPOed.
« Last Edit: May 07, 2013, 01:29:55 PM by Spork »

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Re: Categorizing Mortgage Payments: Spending or Savings?
« Reply #28 on: May 07, 2013, 04:59:05 PM »
The principal payment is definitely savings.  Just like paying down your credit card debt is savings.

Not too sure about that.

If I had $250,000 laying around, and used it to buy a house. I'd consider that spending, not saving.

Or how about this. Two scenarios.

Person A buys a 1000 dollar plasma TV with cash: Spending.
Person B uses a credit card to purchase a 1000 dollar plasma TV. Monthly payments on credit card 50 dollars: Spending or Savings?

Person B spent $1000 when they bought the tv and then saved $50 when they made a payment.

Unless you want to do some strange accounting where you can buy a tv on credit, but it only "counts" as an expense when you repay your debt?

Otherwise you are double counting:

Person A spends $1000 cash on a tv.  Spending
Person B uses a credit card to buy the $1000 tv.  Spending?  Now they make a $1000 payment?  Still spending?  They spent $2k???

Only one of "debt creation" and "debt repayment" can count as an expense, and I think the winner is debt creation.

tomsang

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Re: Categorizing Mortgage Payments: Spending or Savings?
« Reply #29 on: May 07, 2013, 05:41:01 PM »
You can use your credit card to buy some assets of value.  If you are buying gold bullion from the US Mint with your credit card then your assets go up by the purchase and your debt goes up by the purchase.  No change in networth, you just expanded your balance sheet. (This was occuring for a bit where people were getting frequent flyer miles plus the mint did not change the valuation of the gold in real time).   

When you buy a new tv, you have acquired an asset.  Like a new car, it loses 25-50% of the value within 24 hours of purchase.  Your asset would be the amount that you can sell it for, the debt would be the full amount and the expense would be the difference.

A maintained house, over long stretches of time goes up in value.  Like stocks, bonds, and other assets it can go down in value if the markets change, but overall housing goes up in value.  Principal payments are reducing your debt, therefore increasing  the value of the asset.  If your house goes down in value then your asset goes down in value reducing your networth. 

The OP was making extra principal payments.  I can't see how anyone could claim that he was actually increaing his expenses.  He was just playing with his balance sheet without changing his networth.  If he could earn more than 3%, then he would be hurting himself by paying down the mortgage, but the additional payments are clearly not expenses.
« Last Edit: May 07, 2013, 05:42:48 PM by tomsang »

T-Diddy

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Re: Categorizing Mortgage Payments: Spending or Savings?
« Reply #30 on: November 08, 2016, 12:45:05 PM »
This is an old thread, but what the heck, someone else might read this.

The principal portion of your mortgage payment cannot be considered an expense.  If that were the case, the outflows of renting and owning would be on par with each other.  We know that they are not.

But is it savings?  Yes, but a special kind of savings.  Kind of like an egg that costs money to crack open.  If you are going to sell your home and cash in on the equity, it will cost you realtor fees, listing fees, moving fees, transfer and recordation tax, etc.  So we can't just view this as money transferred into a savings account that can easily be withdrawn.  But it is money saved.  And it's fun to watch your net worth go up as your mortgage principal balance goes down.

Here's what my balance sheet/ net worth calc looks like: housing costs consist of interest on mortgage payments, property tax, insurance, and budgeted home maintenance and repairs.  If you were looking at a rent vs. buy scenario, this figure is what you would compare to the cost of renting.  The principal portion of my monthly payment is considered savings at a rate roughly equal to inflation.  Home values go up and down in different markets, but on average, they track inflation - so this works.  But when looking at your net worth, just keep in mind that to access that home equity, it will cost you something to "crack open the egg".