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Calculating Monthly Escrow Payments

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Question: 
When calculating monthly escrow payments for insurance, should these payments be for a twelve month period of time plus the cushion, or just through the policy expiration date plus the cushion?
Answer: 

Escrow collection is based on the costs that you expect to pay out during the escrow analysis year. Generally you will use the following to compute the monthly payment and cushion:

Monthly payment = escrow item's annual cost / 12.

Cushion = 1/6 of annual cost or 2 monthly payment.

Example - insurance premium $600 annually - due Feb 2011 - first scheduled loan payment Nov 2010. You would collect the following for the insurance:

Reserve - 8 months X $50 = $400
Cushion - 2 months X $50 = $100

Initial Escrow Deposit for the Insurance $500. (This is a simple illustration and does not take into consideration the aggregate adjustment.) David Dickinson's escrow analysis worksheet will prove to be very helpful. You'll find it at https://www.bankerscompliance.com/ in the Free Downloads pages, under Lending Tools.

First published on BankersOnline.com 11/08/10
Updated 8/14/18.

First published on 11/08/2010

Last updated on 8/14/2018

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