When you buy a home, your mortgage payment includes more than just the loan principal and interest; it often incorporates property taxes and homeowner’s insurance through an escrow account. The Preliminary Escrow Statement gives you an early look at these costs, helping you understand the full monthly payment you’ll owe.
How Does a Preliminary Escrow Statement Work?
Your lender requires an escrow account to ensure critical bills like property taxes and insurance are paid on time. Each month, alongside your principal and interest, you pay an estimated amount for taxes and insurance, which the lender holds in this account. They use these funds to pay bills as they come due.
The Preliminary Escrow Statement outlines:
- Estimated annual property taxes based on local tax rates and assessed value
- Estimated annual homeowner’s insurance costs
- Monthly escrow payment amount (annual costs divided by 12)
- Initial escrow deposit required at closing, including a federally allowed cushion (typically up to two months of payments) to cover unexpected increases
Example Breakdown
For instance, if your estimated taxes are $4,200 annually and insurance is $1,800, your monthly escrow payment would be $500. At closing, your lender may require an initial deposit to ensure enough funds are available to pay upcoming bills plus the cushion.
| Component | Explanation | Purpose |
|---|---|---|
| Estimated Taxes | Projected annual property taxes | To be paid on your behalf via the escrow account |
| Estimated Insurance | Homeowner’s insurance premium estimate | Protects lender’s investment by ensuring insurance coverage |
| Monthly Escrow | Monthly portion of taxes and insurance | Added to your mortgage payment to fund escrow |
| Initial Deposit | Upfront amount paid at closing to start escrow balance | Covers first bills and cushion required by law |
| Escrow Cushion | Reserve of up to two months of payments as per RESPA | Buffer against unexpected increases |
Common Considerations
- The statement provides estimates; final amounts appear on your Closing Disclosure.
- You may select your insurance provider, which can affect estimated costs.
- Escrow payments can change annually based on tax or insurance changes, reflected in your escrow analysis and monthly payments.
FAQs
Is a Preliminary Escrow Statement the same as a Loan Estimate? No, the Loan Estimate details your overall mortgage loan costs, while the Preliminary Escrow Statement focuses specifically on escrow accounts for taxes and insurance.
Can I opt out of escrow accounts? Some lenders allow escrow waivers if you have strong credit and a substantial down payment, but then you’re responsible for paying taxes and insurance directly.
What if there’s an escrow shortage or surplus? Shortages require either a lump-sum payment or increased monthly payments. Surpluses often result in refunds.
For more detail, visit ConsumerFinance.gov’s escrow explanation.