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How do you calculate prepaid taxes and insurance at closing?

Short answer

Prepaids = first-year insurance premium (paid in full) + 2–6 months of property tax and insurance escrow deposits + daily interest from closing to month-end. On a $400,000 home with 1.1% tax and $1,900 insurance, expect $3,500–$6,000.

Prepaid worksheet: $400,000 home, closing November 15

Prepaid item	Math	Amount
Homeowners insurance, year 1	Full premium	$1,900
Property tax escrow (6 mo)	$4,400/yr ÷ 2	$2,200
Insurance escrow (2 mo cushion)	$158 × 2	$317
Prepaid interest (15 days)	$360k loan × 6.5% ÷ 365 × 15	$961
Total prepaids	—	≈ $5,378

How to read this table

Prepaid interest (15 days) sits at the top of the table ($360k loan × 6.5% ÷ 365 × 15) — $961. If your situation looks like this row, plan against the upper half of the range rather than the midpoint.
Insurance escrow (2 mo cushion) anchors the bottom ($158 × 2) — $317. Treat this as the conservative case you should still be profitable at.
With 5 reference points in the "prepaid worksheet: $400,000 home, closing november 15" table, the fastest way to use this page is to find the closest row, take its math, then stress-test it ±30% before you build a plan on it.

Context

Closing date is a real lever: closing on the 28th instead of the 2nd cuts prepaid interest from ~28 days to ~2 (about $1,700 saved here), though your first payment arrives sooner. Taxes are prorated too — the seller credits you for the months they owned the home in the tax year, which offsets part of the escrow deposit. These aren't junk fees; they're your own bills arriving early, and the escrow cushion is capped by federal law at two months.

What moves this number

Financing terms

Rate, down payment and amortisation drive cash-on-cash return more than purchase price does. The same building can cash-flow or bleed depending on the loan.

True operating expense ratio

Management, insurance, tax, maintenance, vacancy and capital reserve typically consume 35–50% of gross rent. Models that skip reserves overstate returns badly.

Vacancy and turnover

One 45-day vacancy plus a turn can erase a year of thin cash flow. Underwrite 5–8% vacancy even in tight markets.

Local regulation

Rent rules, short-term rental caps and licensing requirements change the achievable revenue of an identical property between neighbouring cities.

Methodology

Tax at 1.1% of value, insurance $1,900/yr, 6.5% 30-year loan at 90% LTV. Escrow deposits sized per RESPA aggregate accounting with a 2-month cushion.

Assumptions and caveats

Returns exclude appreciation and principal paydown unless a row states otherwise.
Local tax, insurance and regulation can move these figures by several points in either direction.
This page was last reviewed on 2026-10-01. Ranges are updated as new data lands, so re-check before using them in a contract or a plan.
Use these numbers as a starting range, not a guarantee — your own historical data always beats a benchmark.

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