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Mortgage payments are just one of several costs you incur when you buy a home, including homeowners insurance and property taxes. Your mortgage lender has a vested interest in making sure these bills get paid on time, so it collects the payments from you in advance. The lender holds the funds in an escrow account until the bills come due.
If the lender overestimates the amount it needs to pay the bills for a given year and charges you too much, you might be entitled to an escrow refund.
After your mortgage lender approves your loan application, it goes to work not just processing the loan but also ensuring that your homeowners insurance and property tax will be paid on time. It does that by opening an escrow account to hold the funds needed to pay your insurance premium and tax bill for the upcoming year. The lender may also require a reserve of up to two months’ worth of escrow expenses in case the insurance or tax bill increases unexpectedly.
A mortgage that works this way is called a PITI loan because it includes principal, interest, taxes, and insurance. One benefit of having a PITI loan is that you don’t have to worry about managing the insurance and property tax bills. The lender gets its own copies and pays them directly from the account, with no action needed on your part except to verify that the bills have been paid.
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Although the lender or mortgage servicer pays the bills on your behalf, it uses the advance payments you’ve paid into the escrow account. The lender likely will have opened the account by the time you close on your loan.
Before closing, the lender also determines the total amount needed to make the upcoming payments. If, for example, the seller has already paid part of the property tax, you’ll only need to escrow the remainder due, plus up to one-sixth of the costs as a cushion, or reserve. You’ll pay those escrow items at closing.
The lender also adds up the total for the following year’s bills and divides the amount by 12 to calculate a monthly payment. It adds that monthly payment to your regular mortgage payment but earmarks the funds for the escrow account.
Insurance companies raise and lower homeowners insurance premiums, and municipalities and counties change tax rates from time to time. The law requires mortgage lenders to analyze borrowers’ escrow accounts each year — with the “year” calculated using the first escrow payment date as the anniversary date — to make sure they’re not collecting too much or too little in light of any changes going into effect for the coming year.
The lender then sends the borrower an escrow statement, which has information about the previous year’s disbursements along with a running balance. The statement also shows the amount needed to meet the minimum balance (expenses plus reserves) for the coming year and indicates if the borrower’s current payment amount will result in a shortfall or surplus.
When an escrow analysis shows that the escrow account won’t have enough money to pay the next year’s insurance premiums and tax bills, it will notify you of the shortfall and give you a couple options. One is to make a lump-sum payment to cover the shortfall. Alternatively, the lender can spread the shortfall amount over a number of monthly payments added to your mortgage payment.
If, on the other hand, the analysis shows a surplus — which means you’re paying more into escrow than you need to — it can do one of two things: reduce future payments or issue a mortgage escrow refund.
What is an escrow refund?
An escrow refund is money returned to you when an escrow analysis shows a surplus in the account. A surplus occurs when you’ve paid more into the account than the lender needs to pay your homeowners insurance and property taxes and maintain a reserve.
When do you get an escrow refund?
You’ll receive a refund from escrow in any of the following circumstances:
An analysis reveals a surplus of $50 or more. When a surplus totals $50 or more, mortgage escrow refund rules state that the lender must refund it to you within 30 days after the analysis. The lender may credit smaller surpluses to the following year’s escrow payments.
Your homeowners insurance premium or property tax rate decreases. A decrease in the amounts due from your escrow account could lead to a surplus of $50 or more.
You repay your mortgage loan in full. Your relationship with your lender ends once you’ve repaid your loan in full. At that point, you’ll be responsible for submitting your own homeowners insurance and property tax payments.
You cash-out refinance with a different lender. A cash-out refinance pays off your existing mortgage, so it entitles you to an escrow refund. But your new lender will open an escrow account, too, so it usually makes more sense to transfer the funds into the new account.
You sell your home. A home sale also results in an escrow refund because you’ll pay off your mortgage with the proceeds of the sale. The lender will then refund your escrow balance.
How do you get an escrow refund?
Once your lender’s escrow analysis identifies a surplus, it has up to 30 days to issue a refund. The precise process for that varies by lender.
For example, Wells Fargo, like many banks, sends you a refund check for the overage amount. U.S. Bank, on the other hand, lets you select how you want to receive it — as an electronic deposit into a checking account or via a paper check mailed to your home.
How long does it take to get an escrow refund?
When a surplus equals $50 or more, the lender must refund the amount within 30 days. In the case of a full loan repayment, the lender should issue an escrow balance refund within 20 days.
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Escrow refund FAQs
If you think you might be getting an escrow refund, here’s some additional insight on escrow accounts and what you might do with the extra money.
What should you do with an escrow refund check?
The best use for your escrow refund depends on the circumstances. If you received it because you’re refinancing your mortgage with a different lender, or you’ve sold one home to purchase another, your best bet is to transfer the funds to the escrow account opened by your new lender. If, on the other hand, the refund is from an overpayment or loan payoff, consider depositing it into a savings account.
Do you get an escrow refund every year?
Unless the account is being closed because you’ve paid off the loan, you only get an escrow refund if you’ve overpaid. That could happen if you made an unnecessary escrow payment or the lender overestimated how much it needed to collect. In either case, it’s unlikely to happen every year.
What happens to extra escrow money?
Extra escrow money in an amount less than $50 is usually credited to the following year’s escrow. The lender must return excess funds of $50 or more to you, unless you opt for a credit.
Do you have to pay taxes on an escrow refund?
No. The money refunded to you is unused money you paid into the account. It’s not a payment from the lender.
Who manages an escrow account?
Your mortgage lender opens and manages the escrow account.
Daria Uhlig is a freelance writer and editor with over a decade of experience creating personal finance content. Her work appears on USA Today, Nasdaq, MSN, Yahoo Finance, Fox Business, GOBankingRates and AOL. As a licensed Realtor and resort property manager, she specializes in real estate topics, including landlord, homeowners and renters insurance. In her spare time, Daria can be found photographing people and places on Maryland's Eastern Shore. Connect with her on LinkedIn.