Tax Escrow Account

When you’re sitting at the closing table going over the closing statement (HUDs), whoever is doing the closing will point out a line labeled county taxes (usually line 211). It will have two dates; the first date will be January first and the second the day you’re closing. There will also be a dollar amount, and that’s the property taxes on the home you’re buying for that year. Since you’re closing somewhere between January 1 and December 31, the property taxes will need to be prorated. Incidentally, property taxes are typically due by November 30, but the tax year is calculated from January 1 to December 31. Back to the closing and line 211. For example, suppose you’re closing on March 27 and the property taxes for the year are $1,364. From January 1 to March 27 are 86 days the sellers have owned the property, and they owe the taxes for those days. So dividing $1,364 by a 365-day year equals $3.74 a day times the 86 days, which yields $321.38; that is the sellers’ portion of the property tax. Since the taxes won’t be due until November when you or the bank escrow pays the full $1,364, the people doing the HUD statements give you a credit for the sellers’ portion or $321.38.
But there’s still more if you’re going to be paying your taxes through an escrow. To get the escrow set up, the lender will usually charge you three to five months of tax payments on line 1004. In the example above, the monthly tax payment is $1,364 divided by 12 months or $113.67.
If the lender requires five months in the escrow at closing, you’ll be charged five times $113.67 or $568.35 on line 1004. Then each month you’ll pay $113.67 or whatever it takes, so you’ll have enough in the escrow by November.