When you buy a home, your mortgage lender may require you to put funds in an escrow account. Escrow funds are used to pay property taxes and insurance premiums, and escrow allows you to save for these payments over time. Because taxes and insurance can change every year -- they usually rise -- lenders ask you to put a "cushion" in the account so a shortfall doesn't occur. Calculating how much you'll need to deposit in your escrow account is simple: You'll need two months of tax and insurance payments as the cushion.
1. Add the annual costs of your property taxes and insurance together and divide by 12. This is how much you'll pay each month into your escrow account.
2. Create an escrow deposit chart with three columns and 12 rows. Label the first column "Month"; your first month is the month in which your first payment is due. Label the second column "Payments"; identify on the chart the months in which property tax and insurance payments are due. Taxes are usually paid in semiannual installments, and insurance is usually paid annually. Label the third column "Escrow Balance"; this column is a running total of each of your monthly escrow payments, less any tax or insurance payments.
3. Calculate the escrow balance. For example, if your 12-month period begins in January and in each month you pay $500 into escrow, by April you have accumulated $2,000 if no tax or insurance payments have been made yet. If you make a tax payment of $2,500 in June, your escrow balance is then $500 (because 6 months times $500 in payments is $3,000, and $3,000 minus the $2,500 in tax payments is $500).
4. Calculate the initial escrow statement deposit. Take the month with the lowest escrow balance -- it might be a negative number -- and add that to two times your monthly escrow payment.
5. Deposit the initial escrow statement balance into your escrow account. This is your escrow "cushion."
Items you will need
- Annual property tax bill
- Property insurance premium figure
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