What is a mortgage loan?

Definition of Mortgage Loan

A mortgage loan is a loan associated with the purchase of real estate, such as a home or buildings used in a business. As part of the loan process, the lender files a mortgage with the county where the property is located. The mortgage provides a lien on the property that protects the lender if the borrower fails to pay the amounts owed.

Example of a Mortgage Loan

Typically, mortgage loans are long-term loans requiring monthly payments of interest and principal. For example, assume that a company wants to buy a vacant warehouse for $500,000. The company's banker agrees to lend the company $350,000 in the form of a 5-year mortgage loan with monthly payments of interest and principal. The mortgage filed with the county where the warehouse is located shows that the bank has the first claim on the property for any principal and interest owed by the borrower.

On any given date, the borrower is liable for the unpaid principal balance plus any accrued interest expense up to that point. The borrower's balance sheets will report:

  • A current liability for 1) the principal payments that will be coming due within one year after the balance sheet date, and 2) any accrued interest that is owed as of the balance sheet date. (Future interest is not reported as a liability until the accounting periods in which the interest has accrued.)
  • A long-term (noncurrent) liability for the difference between 1) the total unpaid principal balance owed as of the date of the balance sheet, minus 2) the principal payments that are reported as a current liability

The lender's balance sheet will report a current assets for the principal amounts to be received within one year of the balance sheet date and any accrued interest, and a long-term asset for the principal to be received after one year.

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