When you’re buying your home, most mortgage companies will require you to open and maintain an escrow account. Most people are confused during this process since they hear of two escrow accounts involved during a typical real estate transaction.
The first account is used before you close the deal. It’s used to hold the earnest money, which is returned to you after closing. The second one is required by your mortgage lender to facilitate the property taxes and the homeowner’s insurance after closing. You regularly make payments to the escrow account, and the mortgage company uses these funds to settle the bills for you.
What happens when the account has more money than is needed to pay the bills? While it may seem impossible, there are reasons why this may happen. In such cases, you should get an escrow refund. Nothing would make a new homeowner happier than being eligible for a refund.
In today’s article, we gain a comprehensive insight into what escrow refunds are, and when you may qualify for one. But first…
What Is an Escrow Account?
Before we can look at what an escrow refund is, it’s great to get the basics first. Once you close on a property, your mortgage lender will set up a bank account for you. This is the account we refer to as the escrow account.
As we’ve seen, you send some money to this account regularly to help pay for property taxes and insurance. Instead of scheduling your bills and paying property taxes and insurance separately from a checking account, mortgage lenders collect these fees through installments as part of your mortgage payments.
Mortgage companies do this to protect their interest in your home by ensuring you’re paying your bills on time. The lender holds this money in your escrow account and pays the bills on your behalf.
The term “Escrow” generally means a third-party holding your money or an item, and then carrying out a certain action on the money once some conditions are met. In this case, the bank that holds your money is the third party. You also don’t manage the escrow account by yourself.
What are the advantages of an escrow account? They include:
- Automatically pay your bills: An escrow account ensures your bills are automatically paid when they’re due. This ensures you avoid penalties for late payments or losing your home.
- Makes it easier to budget: Many homeowners find it easier to pay a certain amount of money to their mortgage lenders to cover the property bills. If paid separately, these bills can break your budget.
- Gives you peace of mind: It’s tough when you have to make separate payments for different bills each month. An escrow account lets you have peace of mind by simply making one deposit to the account.
- Avoid surprises: Your mortgage lender lets you know the amount of money you need to deposit to your escrow account each month. If property taxes increase, they’ll let you know in writing. The lender also sends an annual statement that includes all payments you’ve made, including overages and shortages.
While escrow accounts have many benefits, it doesn’t mean that they don’t have any cons. They include:
- Less control: Some people love to have complete control over their finances and bill. If you’re one of those people, an escrow account may be uncomfortable for you. You might spend your time worrying about missing some payments.
- Missing out on interest rates: Some states require mortgage lenders to put escrow money in interest-bearing accounts. Unless you’re in such a state and you want your money to grow, you might want to put that money in a savings account or invest in an income-generating venture.
- High monthly payments: Your monthly mortgage payments will include property tax fees and homeowner’s insurance. This means you’ll be paying a huge amount every month that might leave less room in your monthly budget.
Escrow accounts are governed by the Real Estate Settlement Procedures Act (RESPA) which has been in place since 1974. This act lets mortgage providers keep 1/12th of your payments to cater for property bills. In addition, it allows the lender to keep an amount worth up to two months of additional escrow payments as a safety net.
What Is an Escrow Refund?
Now that we’ve understood what an escrow account is, is escrow refundable? Yes, you can be eligible for an escrow refund. How?
RESPA has a limitation on the amount of money that can be kept in an escrow account. The guidelines stipulate that the amount in the account isn’t supposed to be more than the next month’s payment plus two months of payments. If the amount exceeds, you’re eligible for a refund.
The guidelines further state that the excess amount must be greater than $50 for you to request a refund. If the overage is less than $50, the mortgage lender can keep the amount in the account to service future bills.
Escrow refunds also happen once you’ve fully settled your mortgage repayment. If there’s a balance in the escrow account, it should be returned to you. Mortgage lenders should refund the amount within 20 days after finishing the mortgage repayment.
Other than the reasons mentioned above, you could also be eligible for an escrow refund if:
- Tax bills are lowered: Tax bills change every year. If the property tax bill is lowered, there’s a chance that you’ll receive an escrow refund.
- You change your insurance provider for another with friendlier fees: You’re also eligible for an escrow refund if you switch up insurance companies for a better rate.
- You overpay at the time of purchase: In some cases, you may make a payment larger than was required at closing. If you do this, you qualify for an escrow refund.
- You and your mortgage lender pay for the same bill and the amount is refunded to the lender
As we’ve mentioned, some states require escrow accounts to have interest rates. This could also lead to a surplus in the account.
There are no limits to the maximum amount of money you can receive during an escrow refund. This makes sense as the money is yours, after all. The only limitation is in the minimum amount, which is $50.
How long does it take for an escrow refund to happen? Once you’ve identified an overage, notified your mortgage lender and analysis has taken place, RESPA requires the company to refund you within 30 days.
What Are Escrow Refund Checks?
When you receive an escrow refund, you get a check containing the amount of money that was in excess in the escrow account.
Once you identify an overage, you request a refund from your mortgage lender. After the required annual escrow account analysis, the mortgage provider is likely to issue a refund check.
As for the timing, you can get a refund during any month of the year. During the analysis, the loan servicers check whether the escrow payments match the monthly bills paid out of the escrow account.
For example, let’s assume that tax bills changed in July. During the rest of the year, you continued making the mortgage payments in full amount. You’re likely to have a surplus amount in your escrow account once they carry out the analysis in December. At this point, the mortgage lender will issue an escrow refund check.
Keep in mind that it’s not always obvious that the lender will issue the refund check. You may have to make a formal request.
What Is a Refinance Escrow Refund?
Refinancing a mortgage means getting a new loan once you’ve cleared an existing mortgage. Many homeowners refinance their mortgage to gain lower interest rates, shorten their mortgage term, or tap into their home equity to get funds for a financial emergency or pay debts.
So, do you get escrow back when refinancing? You’re eligible for an escrow refund once you refinance your mortgage, but with conditions.
If you’re refinancing your mortgage with your original mortgage lender, your escrow account will remain intact. The existing funds already in your account will remain in the escrow account. As such, don’t expect an escrow refund unless the property taxes or property insurance has changed.
However, things are different if you refinance your mortgage with a different lender. Once you’ve completed the mortgage refinance with the new lender, they’ll open a new escrow account for you. This means that your original escrow account will be closed. You’ll receive a refund check with the balance in your original escrow account.
What Is an Escrow Balance Refund?
An escrow balance refund refers to the check you receive for the entire balance in your escrow account. This is essentially an escrow refund. However, instead of receiving a check with a portion of the balance in your account, you get the entire amount.
An escrow balance refund happens once you’ve fully paid off your mortgage and there’s some balance in your escrow account.
How Do You Calculate Escrow Refund Amount?
Calculating your escrow refund amount isn’t that complicated. Firstly, you need to establish how much money you pay to your escrow account monthly. Remember, your payment is usually a combination of your property taxes and homeowner’s insurance expenses. Add these numbers up and you have your monthly escrow payments.
After this, think of the cushion amount that your lender is allowed to keep by RESPA. Again, this amount should be worth two months’ payment. To calculate this amount, simply take your monthly escrow payment amount and multiply it by three. This should be enough to cover the next payment and remain with a two months’ balance. The amount you get is the total your lender is allowed to keep in the escrow account.
Now that you have this number, look at how much money you have in your escrow account. If the difference is more than $50, you may be eligible for an escrow refund. Remember that there’s no limitation to the maximum amount you can receive as a refund. It only needs to be more than $50.
How Do You Ask For an Escrow Refund?
Once you’ve calculated your escrow refund, it’s now time to request a refund check from your mortgage lender. The mortgage servicing company will not carry out a new escrow account analysis based on verbal communication.
How do you go about this? You will have to provide documentation as proof for your claims. Examples of documentation you can provide include:
- Letters from your tax assessor showing changes in tax liability
- Documents showing new insurance policies
- Recent tax bills
When submitting a claim to your mortgage lender for an escrow refund, we recommend you prepare a detailed request letter, even if your mortgage provider may not require you to do so. The company representative you submit your request to isn’t the one performing the escrow account analysis.
You can use the request letter to ensure you explain your situation better since crucial details can be lost in the communication process by the third party. Having a detailed letter will prevent the need for having to follow-up, which can further delay the refund process.
How Long Does an Escrow Refund Take?
You might be wondering, when will I get my escrow refund after refinancing?
If you’re not in a hurry to get your refund, you can wait for a few months to get the check. It could take a few months since mortgage lenders conduct the escrow account analysis annually. However, notifying your lender and asking for a new analysis in your letter could speed up the process.
In the request letter, ask the lender to provide you with a due date so that you can know when to expect the check. You always follow up with them if they’ve provided any updates past the due date.
To help with the follow-up process, you can request the name and contact details of the representative you’re talking to. This can help both you and the lender should the escrow account analysis take longer than expected.
All in all, be prepared to wait. It can take several weeks, sometimes months, to obtain an escrow account analysis and receive the escrow surplus check.
An escrow account is instrumental in taking some weight off your shoulders when paying property bills, such as taxes and insurance. It’s convenient for both parties involved as it ensures the bills are paid on time.
An escrow refund takes place when there’s a surplus of the required money in the account. If you find that there’s an overage, you can always write to your mortgage lender and request an account analysis. Once the process is complete, you’ll receive an escrow disbursement check.
If you would love access to automated tools that let you know how various changes will affect your mortgage, use Mashvisor Mortgage Calculator. This tool factors in your input to give accurate calculations. Ensure you’ve done due diligence before so that you can enter precise property taxes, insurance, and other fees in the expenses section.