Question:

How to calculate the maximum escrow account deposit for hazard insurance (homeowners insurance) and tax payments?

To calculate the maximum escrow deposit, you first need to know a ruling by the US Department of Housing and Urban Development (HUD).

According to it, lenders are bound by the law to request an escrow deposit not greater than an amount that keeps the escrow account balance at two months of tax and insurance payments, at its lowest point in the year.

This means that the maximum amount lenders can ask for is limited and you can use your insurance and tax payments to find out that amount.

Example:

Let's consider an example. Suppose, on a mortgage, a borrower pays the following:

 Total Payments \$3600 Insurance premium \$700 due in February Local Tax payment \$400 due in March Federal Tax payment \$2500 due in July

Assume that the mortgage period begins in January and that there is no initial deposit in the escrow account. So, the monthly deposits will be \$3600/12 = \$300.

Now we make the first year table of escrow deposits and payments:

Month Balance Deposits Payments
January \$0 \$300 \$0
February \$300 \$300 \$700
March (\$100) \$300 \$400
April (\$200) \$300 \$0
May \$100 \$300 \$0
June \$400 \$300 \$0
July \$700 \$300 \$2,500
August (\$1,500) \$300 \$0
September (\$1,200) \$300 \$0
October (\$900) \$300 \$0
November (\$600) \$300 \$0
December (\$300) \$300 \$0

As we can see, the lowest point of the escrow account comes at the start of August where the balance goes \$1500 below zero. As the borrowers are allowed to ask for a deposit that allows them a two-month cushion of payments at the lowest point, they can ask a maximum escrow deposit of \$1500 + (2 x \$300) = \$2100.

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