If you are planning to get a mortgage when buying your home, it's very likely the lender will require you to maintain escrow accounts. With an escrow, you pay additional funds each month on top of your mortgage payment to cover property taxes and insurance premiums. The money is saved in the account -- which is managed by a third party -- until the payments are due. The lender then makes the payments on your behalf. Mortgage companies often require escrow accounts to ensure that these miscellaneous expenses are always paid. Failure to pay your property taxes could result in a lien being placed on the property. The amount you pay each month is determined by the total yearly expenses.
Determine the total amount owed for the year. This amount only includes the payments that will come out of the escrow account. Generally, this includes property taxes, homeowner's insurance and forms of hazard insurance.
Divide the total by 12. This gives you the monthly payment amount.
Calculate the estimated cushion amount your lender can collect. This is 1/6 of the total yearly payments, or two months additional payments, according to federal regulations as of publication. Divide that total by 12 to estimate the monthly cushion payment.
Add the monthly payment amount and the cushion payment. The total is an estimated value for your monthly maximum escrow payment required by the lender to be placed in an account.
- By law, the lender is only allowed to hold two months worth of escrow payments as a cushion. Often, when you obtain a new mortgage loan the lender will collect money to establish the escrow account as part of your closing costs.
- The amount of escrow money your lender collect will change over time. This is because property taxes and insurance premiums will fluctuate.