1. Homeowner’s Insurance - $550 (three months of insurance, based on a premium of $2,200)
2. Property Taxes - $4,997/$1,944 (nine months of a property tax bill of $6,662)
So why nine months? Well, remember the taxes are due on December 1st in this example. That means the lender needs to ensure there’s enough money in the escrow account to pay that bill by the due date. Since we’re closing on June 15th, our first payment will be on August 1st.
That means you’ll make four payments (August, September, October, and November) before the taxes need to be paid. $6,662 divided by 12 months of the year is $555 per month. So if you make four payments of $555, that means you’ll deposit $2,220 into the escrow account over that four month period.
This is far less than the $6,662 that is required. Therefore the additional money is collected at closing. Now if you’re a math wiz you’ve probably already noticed that $4,997 + $2,220 = $7,217; which is more than the tax bill. The reason for this is because similar to insurance, the escrow account needs a “cushion” for the property taxes as well.
Remember that taxes change each year, and your lender is collecting money from you to pay a bill that hasn’t been produced yet. The best they can do is base it off the last tax bill. But the extra money in the escrow account helps ensure that if the bill comes in higher than the previous year, there should be enough money in the account to cover it.
It’s important to note that our closing date is June 15th. That means we are only responsible for the property taxes after that date. Therefore, the seller is required to pay five and a half months of taxes at closing. At a rate of $555 per month, that equates to $3,053. So of the $4,997 due at closing, the seller will pay $3,053. That reduces the portion you pay to $1,944