The determination of funds held in trust to cover property tax and insurance obligations involves several key steps. First, the annual amount for property taxes is ascertained, typically obtained from the local tax assessor’s office. Next, the annual cost of homeowner’s insurance is identified. These two figures are then summed together to derive the total annual escrow requirement. This annual requirement is subsequently divided by the number of mortgage payments made per year (usually twelve, for monthly payments) to arrive at the periodic deposit amount. For example, if annual property taxes are $3,600 and annual insurance is $1,200, the total annual escrow requirement is $4,800. Dividing this by 12 results in a periodic escrow payment of $400.
Maintaining an escrow account offers several advantages. It ensures that property taxes and insurance premiums are paid on time, preventing potential penalties or lapse in coverage. Lenders often require escrow accounts as a risk mitigation strategy, ensuring that the property is protected and that government obligations are met. Historically, escrow accounts provided a structured method for homeowners to budget for significant, but less frequent, expenses, reducing the risk of financial strain when these bills become due.
