How to Calculate Escrow for Low-Point Cushion
Original post by Lisa Bigelow of Demand Media
Escrow accounts are frequently used by home lenders who wish to keep a reserve of funds available for payment of a homeowner's property tax and insurance payments, while making payments on behalf of the homeowner. These homeowners make an initial deposit into the escrow account at closing, and then contribute to the account every month with their mortgage payment. Lenders require a "cushion" in the account to make up for property tax and insurance increases, in addition to potential missed payments. The Department of Housing and Urban Development permits lenders to keep no more than two months' cushion in escrow.
Add your annual property tax bill to your annual insurance premium. Property taxes and insurance are two items that are commonly paid by the lender out of the escrow account on behalf of the borrower. Some borrowers may be able to have the escrow requirement waived, although lenders won't always permit it. To qualify, borrowers must typically put down 20 percent and have excellent credit, according to LendingTree.com.
Divide the total from Step 1 by 12. This is your monthly property tax and insurance payment; it's the amount that's added to your mortgage principal and interest payment every month. If you waive escrow, you'll need to plan to put this amount aside monthly on your own.
Multiply the result from Step 2 by 2. This two-month escrow cushion is the maximum amount that your lender is allowed to keep by law. If you're ready to close on a home purchase, plan to bring this amount to deposit into your escrow account. In the future, your lender may use this cushion to pay taxes or premiums that have increased unexpectedly.
- Property tax bill
- Homeowner's insurance annual premium
- Lending Tree: Escrow: What It Is and How It Works
- Mortgage Professor; How Do I Figure Escrow?; March 2011
About the Author
Lisa Bigelow is a freelance writer and editor. She is a former financial analyst and worked at a college, a media company and an investment bank. She also contributes to Patch. Lisa graduated from the State University of New York, Plattsburgh with a Bachelor of Arts in mathematics.