Estimating Escrow Account Balances
This calculator can estimate the deposits that may have to be made into an escrow account to pay for things like property taxes, flood and homeowners insurance. The calculator needs a total of four inputs, including:
- The amount of property taxes or real estate taxes due on the home each year.
- If the home requires flood insurance, enter the annual premium paid on that policy
- The annual premium paid on the homeowners insurance policy
- Finally, the number of months before the first payment is made from the escrow account. This value is particularly useful for anyone closing on a home
The calculator then provides the user with five outputs, including:
- An estimate of the starting balance for the escrow account
- The monthly payment needed to fund the account
- The total of all payments made from the account in a calendar year
- The minimum balance required in the escrow account, which is typically two months of payments
- The maximum balance of the escrow account, which depend on factors like the timing of insurance policy and property tax payments
What is the Purpose of Escrow and How does it Work?
Many of us are introduced to the concept of escrow for the first time when buying a home. Escrow accounts can be used to protect both the buyer and seller of a home until the transaction is complete. These accounts can also be established by lenders to hold funds for the payment of real estate / property taxes as well as flood and homeowners insurance.
In either of the above cases, the money is provided to a third party, known as an escrow agent, who is responsible for disbursing the funds. Escrow accounts exist until certain conditions are met. Once this happens, any funds remaining in the account are sent back to the person funding the account.
For example, a lender may require the borrower to fund an escrow account. Once the loan has been repaid, the funds in the escrow account are given back to the borrower. Since the escrow account will always maintain a minimum balance, borrowers have two things to celebrate: paying off the loan and receiving the money in the escrow account.
Funding an Escrow Account
Our calculator can be used to develop an estimate of an escrow account’s funding requirement. In practice, lenders perform a calculation annually since property taxes and insurance payments will change over time. Lenders typically require a minimum of two months of escrow payments in the account. You’ll notice our calculator’s Minimum Balance is exactly twice the monthly payment estimate.
The Months before First Payment information is used to determine the Starting Balance of the fund. The longer the time before the first payment is due, the lower the starting balance in the fund. Regardless of the number of months before the first payment is due, the starting balance will never fall below the minimum balance.
The value for Total Payments represents the total of all payments made in a calendar year, which is the sum of the annual real estate taxes and insurances. Finally, since all the payments from the escrow account may not happen every month, the amount of money in the escrow fund can grow quite large as reflected by the Maximum Balance value.