I refinanced, and my previous lender owes me an escrow refund
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In most cases, mortgage lenders require you to add money to your principal and interest payments called “impounds” or “escrows.” And sometimes, they owe you an escrow refund.
- The lenders use impounds to pay your property taxes, homeowners insurance and sometimes other costs
- However, your impounds can be adjusted annually, or canceled if you sell or refinance your home
- In that case, your lender may owe you an escrow refund
Here’s how to get that money back.Verify your new rate (Dec 11th, 2018)
Escrow refunds are a common event, checks that come after a mortgage is refinanced or paid off. Sometimes escrow refund checks can total several thousand dollars.
Before looking at how to get back escrow account money, we need to know how such accounts are created and funded in the first place.
Escrow accounts and 20 percent down
If you purchase a home with less than 20 percent down, the lender will almost always require the establishment of an escrow account. Escrow means “trust.” An escrow account is designed to hold your money. It’s administered by the mortgage servicer, the company that also collects your monthly loan payments.
Generally, an escrow account is used to collect money to pay such costs as property taxes and insurances. In some cases, there can also be collections for other costs, such as flood insurance.
However, if you buy with 20 percent down or more, you may still want to create an escrow fund. The reason is that it’s an easy way to budget for property taxes and property insurance.
How much can lenders hold in escrow?
Lenders can hold no more in escrow than the annual cost for such expenses as property taxes and insurance, plus a reserve equal to 1/6th of the required amount, plus $50.
If property taxes are $6,000 and property insurance is $1,800 the maximum escrow amount will look like this:
- Property taxes = $6,000
- Property insurance = $1,800
- Subtotal = $7,800
- 1/6th of $7,800 = $1,300
- $7,800 + $1,300 = $9,100
- $9,100 + $50 = $9,150
In this example, the most that can be kept in the escrow account is $9,150.
You want your escrow account to cover all required tax and insurance costs. If your insurance policy is canceled, not renewed or does not provide sufficient coverage, the lender can buy a replacement policy and force you to pay the premium.
The cost of a force-placed policy can be several times what you would pay with a traditional insurer. Avoid force-placed insurance and always be certain you have proper coverage.
Escrow refunds and annual statements
Once a year, the mortgage servicer must provide an analysis of the account. It will show how much has been in it each month, as well as the dates when money has been dispersed. The statement will also adjust your required monthly payment up or down.
If there is too little money in the account, the lender will typically give you a choice. You can pay any shortage in a lump sum or in 12 equal monthly payments. The lender adds the extra charge to the monthly mortgage payment.
If the escrow account has too much money, there are several options.
First, anything above the two-month reserve plus $50 must be returned to you.
Second, if the overage is less than $50, the lender can choose to return the money to you or credit to the account.
Escrow refunds if you refinance
When you refinance, you replace one mortgage with another. Funds from the new mortgage will be used to repay the old loan.
Refinancing also means that loan servicing may be transferred from one servicer to another. This is the time when you need to work carefully with your new lender and your old lender. The basic issues include:
First, when should you stop paying the old lender? Be careful with this. You do not want to be delinquent. Check with both the new and old lenders.
Second, avoid double payments! Speak with your new lender and closing agent to assure that you do not make additional payments to the old lender. Double payments can set off a lengthy and complex process to get the money back.
Third, by any chance, do the new and old loans involve the same lender? If yes, ask if the escrow funds now being held by the lender can be credited at closing to the new escrow account. This will significantly reduce your closing costs.
Fourth, watch for late fees. If your mortgage will be managed by a new loan servicer, there can be some confusion regarding who to pay and when.
“There is a 60-day grace period after the transfer,” says the Consumer Financial Protection Bureau, “during this time you cannot be charged a late fee if you mistakenly send your mortgage payment to the old servicer.”
Fifth, the old lender must mail a refund check for any escrow excess within 20 days.
For further information speak with your closing agent as well as your old and new lenders. They each have experience in this area and can explain how escrow refunds are handled.Verify your new rate (Dec 11th, 2018)