Prepaids and Initial Escrow Payment

At time of issuing Loan Estimate, we will use best available data to calculate prepaids and initial escrow payment due at closing based on the industry standard methods. Prepaids and initial escrow payment are recoverable "soft" costs used to pay your taxes, your homeowner's insurance and your interest. To calculate prepaids and initial escrow payment correctly, one needs to know:

  • Loan closing date
  • Latest 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

There are no laws or regulations requiring any accuracy in initial calculations of prepaids and initial escrow payment provided to consumers on the Loan Estimate. There are, however, industry standards on how these figures need to be established for the final Closing Disclosure. We value accuracy and will make every effort to calculate prepaids and initial escrow payment as close to actual/final as possible on the Loan Estimate, assuming we have the correct data.

Establishing Prepaids due at closing (Loan Estimate Section F)

  • Any tax payment due within 60 days from closing (too early to disburse from escrow)
  • Any amount outstanding on current insurance policy. Additionally, if the policy renews within 60 days from closing, renewal premium needs to be settled at closing
  • Interest covering the period from funding date till end of the month
 

Establishing Initial escrow payment due at closing (Loan Estimate Section G)

Taxes
By the time the tax payment needs to be disbursed from escrow, the account must accumulate, through initial escrow payment collected at closing and regular payments made since, the number of months to be disbursed (three of six) plus two months cushion.
Insurance
By the time insurance renewal needs to be disbursed from escrow, the account must accumulate, through initial escrow payment collected at closing and regular payments made since, annual insurance renewal premium plus two months cushion (fourteen months total).

 

---Example---

Loan closing date: March 16, 2020
Loan funds on March 20 (assuming refinance of primary residence), first payment is due on May 1.
Real Estate Tax payment frequency: Quarterly
Homeowner’s insurance renewal date: September 20, 2020

Prepaids due at closing (for this example)

  • Quarterly 05/01 tax payment (due within 60 days from the closing)
  • Interest covering March 20 to March 31

Initial escrow payment due at closing (for this example)

Taxes
08/01 tax payment will be disbursed from escrow. It will be disbursed in July, ahead of August 1 due date. The account must accumulate five months of taxes by that time. Three months will be accumulated through regular monthly payments to escrow (May, June, July). Therefore, two months must be collected at closing.
Insurance
Insurance renewal will be disbursed in September. The account must accumulate fourteen months of insurance by that time. Five months will be accumulated through regular monthly payments (May, June, July, August, September). Therefore, nine months of insurance must be collected at closing.

Total prepaids and initial escrow payment due at closing (for this example):

Five months of taxes, nine months of insurance, pre-paid interest from March 20 to March 31