How Many Months Taxes Are in Escrow at Closing?
Your initial property tax escrow deposit is based on tax due dates, your closing date, and a legally required cushion. Learn how these factors are combined.
An escrow account is a separate account managed by your mortgage lender to handle specific property-related expenses on your behalf. When you make your monthly mortgage payment, a portion of it is deposited into this account. The primary items paid from escrow are your property taxes and homeowners insurance premiums.
Your lender will establish this account at closing, collecting an initial sum to ensure there are adequate funds to cover the bills as they become due. The specific amount required for this initial deposit can vary significantly based on your property’s location, its tax schedule, and the timing of your closing date.
The Purpose of a Property Tax Escrow Account
Lenders establish property tax escrow accounts to protect their financial interest in your home, which serves as collateral for the loan. If property taxes go unpaid, the local government can place a tax lien on the property. This lien is superior to most other claims, including the mortgage lender’s.
A superior lien means that in the event of a sale due to unpaid taxes, the government is paid first from any proceeds, which could leave the lender with a loss. By collecting funds for property taxes and paying the bill directly on your behalf, the lender ensures tax obligations are met on time, preventing tax liens.
This system removes the risk of a borrower forgetting to pay the tax bill or failing to budget for a large expense. For the lender, it is a risk management tool that secures their lien position, while for the borrower, it offers the convenience of spreading a large expense into predictable monthly installments.
Calculating the Initial Escrow Deposit at Closing
The process begins by taking your total estimated annual property tax bill and dividing it by 12 to determine a base monthly cost. From there, the lender calculates how many of these monthly payments are needed to ensure sufficient funds are available to pay the next tax installment on time, while also holding a reserve as permitted by federal law.
A part of this calculation is a cushion that lenders are legally allowed to maintain. The Real Estate Settlement Procedures Act (RESPA) stipulates that a lender can hold a reserve in your escrow account equivalent to no more than two months’ worth of escrow payments. This buffer protects against unexpected increases in property taxes or insurance premiums, ensuring there is enough money to cover payments even if costs rise.
To illustrate, consider a home purchase closing on April 30th with an annual property tax bill of $4,800, which equates to $400 per month. Assume the local government requires property taxes to be paid in two installments, due on August 1st and February 1st. The lender’s goal is to have enough funds to make the August 1st payment. By the time that bill is due, you will have made mortgage payments for June and July, contributing two months, or $800, to escrow. However, the lender needs more to cover the upcoming tax bill.
At the April 30th closing, the lender will collect enough months to bridge this gap and establish the required reserve. They will need to collect payments for February, March, and April to have funds on hand from the beginning of the tax period. This amounts to three months, or $1,200. In addition to this, the lender will collect the two-month RESPA cushion, which is another $800 ($400 x 2). Therefore, the total initial escrow deposit for property taxes collected at closing would be five months’ worth, or $2,000.
Locating Escrow Details on Your Closing Disclosure
You can find the precise figures for your initial escrow deposit on your Closing Disclosure, a standardized document you receive at least three business days before your scheduled closing. The specific information about your escrow account is located in Section G, titled “Initial Escrow Payment at Closing.”
Within this section, you will see line items detailing the amounts collected for both homeowners insurance and property taxes. The property tax line will explicitly state how many months are being collected and the monthly charge, formatted as “Property Taxes __ months at $__ per month.”
This section of the Closing Disclosure serves as the final, official record of your initial escrow funding. It translates the complex calculation into a clear, itemized charge. By reviewing Section G, you can confirm the exact number of months’ worth of taxes being prepaid and the total sum required from you at the closing table to establish the account.