How to Calculate a Mortgage Escrow Deposit

A mortgage contract often requires borrowers to provide an up-front escrow deposit.

Most mortgage companies offer escrow services on their home loans. This is a convenience for borrowers and an additional layer of security for the lender. In essence, if you have an escrow account, your mortgage payment includes the monthly amount required to keep your homeowner's insurance and property and municipal taxes current, in addition to your underlying loan payment. When you refinance or obtain a purchase mortgage, an escrow deposit is required to start the escrow account. Calculating this figure is rather simple.

Things You'll Need

• Copy of homeowner's insurance declaration page
• Copy of tax bill
• Calculator

Instructions

1. Review your homeowner's insurance declaration page and most recent property tax bill. Make sure both are updated (both insurance coverage and taxes can change as your home appreciates). Look for the annual premium on your declaration page. Find the annual taxes due for your home.

2. Divide your annual premium and annual taxes by 12. Add these two figures together. This is the monthly amount required to keep both of these accounts up to date. Write down this figure. Make sure to include any school taxes if they are required by your town.

3. Multiply this monthly figure by two. The initial escrow deposit cannot exceed an amount that would keep the escrow account from falling below two month's worth of escrow payments during the year. In other words, you can safely figure that the deposit should be close to two months worth of payments, with maybe a little more thrown in for a cushion. This is mandated by the federal Department of Housing and Urban Development. Write down this figure.

4. Contact your lender to determine whether any other fees must be included in your escrow deposit. Sometimes, lenders require borrowers to add more for PMI, or private mortgage insurance. Again, this figure cannot exceed the two-month's-worth-of-premiums rule. Add this figure, if necessary.

5. Add together all figures from Steps 2, 3 and 4. This will be your estimated initial escrow deposit. The lender will set the final figure. Compare your calculated number to the lender number. If there is a large discrepancy, make sure to have your lender review its calculations.

Tips & Warnings

• Do not accept an exorbitant escrow deposit simply because the lender asks for the fee. HUD controls escrow deposits and any abuse of the service may be reported to the agency.

References

• The Mortgage Professor's Web Site: How Do I Figure Escrow Deposit?
• Pic MyMortgage.com: Understand the True Costs