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Prepaids and Initial Escrow Payment

Prepaids and Initial escrow payment are recoverable funds used to pay your taxes, homeowner's insurance and interest. When the loan is paid off, escrow account balance is refunded. On refinances, the amount of prepaids and initial escrow payment is recovered soon after closing, assuming existing escrow account has no shortages, and assuming new escrow account escrows the same items.

 

The following items need to be settled at the closing:

  • Initial escrow payment calculated to allow future tax and insurance disbursements with required cushion
  • Interest from funding date till end of the month
  • Any real estate tax payment coming up within 60 days from the closing (too soon to disburse from escrow)
  • Homeowner's insurance renewal premium, if coming up within 60 days from the closing
  • First year of homeowner's insurance policy (purchase loans)
  • Any amount still outstanding on current year homeowner's insurance policy (refinance loans)
 

To calculate Prepaids and Initial escrow payment correctly, one needs to know:

  • Loan funding date
  • Current Annual Real Estate tax
  • Tax payment frequency (quarterly or semi-annually)
  • Homeowner’s insurance premium
  • Homeowner's policy remaining balance for current year (if not yet paid in full)
  • Homeowners insurance renewal date
  • What is escrowed (taxes and insurance or taxes only)

Lenders are not required to provide Prepaids and Initial escrow payment amounts with any accuracy on Loan Estimates, as not all the needed data is initially available. There are, however, industry standards on how these amounts would be established for the final Closing Disclosure, when all information has been gathered. We value precision and try to calculate Prepaids and Initial escrow payment as accurately as possible on the Loan Estimate, provided we have correct information.