When you close on a home, you’ll encounter the term Initial Escrow Deposit on your closing disclosure. This is the amount of money the lender collects upfront to establish your escrow account—a special account that holds funds set aside to pay property taxes and homeowners insurance premiums.
Lenders require the Initial Escrow Deposit to protect their investment in your home. Since they hold the mortgage, they want to ensure that property taxes and insurance payments, which safeguard the property, are paid on time. Failure to pay property taxes can lead to a lien that supersedes the mortgage lien, while lapses in homeowners insurance leave the property vulnerable to loss without financial backup.
How the Initial Escrow Deposit Is Calculated
The lender estimates your annual property tax and homeowners insurance costs and divides the total by 12 to determine your monthly escrow payment.
For example, if your annual property taxes are $4,800 and your homeowners insurance premium is $1,200, your total is $6,000 per year, or $500 per month.
In addition to these monthly amounts, lenders must add a cushion—typically up to two months’ worth of escrow payments—to handle spikes in bills as allowed by the Real Estate Settlement Procedures Act (RESPA).
At closing, the lender collects enough to cover your anticipated upcoming bills plus this cushion. The exact amount depends on your closing date and payment due dates. Your closing disclosure breaks down this calculation so you know precisely what you are paying.
Escrow Deposit vs. Earnest Money
It’s important to distinguish the Initial Escrow Deposit from earnest money:
- Earnest Money is a deposit made when you make an offer on the home to show serious intent, held by a third party.
- Initial Escrow Deposit is paid at closing to fund your escrow account, held by your lender.
Unlike earnest money, your escrow deposit is generally not refundable but is used solely to pay your property’s taxes and insurance.
Common Questions About Escrow Deposits
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Can you avoid an escrow account? Sometimes, if you make a large enough down payment (usually 20%+), lenders may waive the escrow requirement. However, many government-backed loans require escrow accounts regardless.
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What if my taxes or insurance change? Lenders perform an annual escrow analysis. Surpluses typically result in refunds, while shortages increase your monthly payments.
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Is the Initial Escrow Deposit part of the down payment? No. The down payment reduces your loan principal; the escrow deposit covers future bills.
For more details on escrow accounts and managing your mortgage payments, see our glossary entries on Escrow Account and Escrow Waiver.
For authoritative information, visit the Consumer Financial Protection Bureau’s guide on escrow accounts.