When buying a home, your mortgage lender may set up a mortgage escrow account to manage homeowners' insuranceand property tax payments. Each month, your lender will store a portion of your monthly mortgage payment in your escrow account and pay these bills on your behalf.
Although not common, your lender may overestimate how much you need to pay into escrow, resulting in an escrowsurplus. There are also other reasons you could end up with extra money in your escrow account.
If you have an escrow surplus, you may be entitled to an escrow refund. Here's what you need to know and what you can expect if you are anticipating an escrow refund.
What is an escrow surplus?
An escrow refund is a surplus of money returned to you from your mortgage escrow account. If you have excess funds in your mortgage escrow account, your mortgage servicer or lender may be required to refund you.
Often, when this happens, lenders refund the extra money by mailing a paper escrow check. But not all surpluses result in a refund.
Here’s why: Lenders are allowed to hold an escrow account cushion of up to two months’ of estimated escrow disbursement, so there may be some extra money in your escrow account.
Beyond the allowable two-month cushion, a surplus of $50 or more must be refunded to you. For surpluses of $50 or more, your lender is required to issue a refund within 30 days.
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Understanding escrow accounts
Before discussing what situations lead to an escrow refund, it's helpful to review what escrow accounts are and how they function. An escrow account is a temporary holding account managed by a third party.
During the home buying and home selling process, escrow accounts hold funds until the real estate transaction is complete. Earnest money, loan fees, down payments, and real estate commission fees are examples of money that may be held in escrow.
But that's not the only way escrow accounts are used in real estate. If you're a homeowner, your lender or loan servicer may have you use a mortgage escrow account. Is escrow required when you get a new mortgage?
Are escrow accounts required?
Not all borrowers are required to have an escrow account. Some lenders won't require you to pay your insurance or property taxes through escrow.
However, if you don't meet the eligibility requirements to waive escrow or if the type of home loan you have requires escrow payments, your lender will likely set up an escrow account. Your lender will collect and hold a portion of your monthly mortgage payment in the escrow account.
This portion of funds is called an escrow payment, and it covers your homeowners' insurance premiums and property taxpayments for the year. When it's time for these bills to be paid, your mortgage servicer will send payments on your behalf using money held in your escrow account.
What is an escrow analysis?
Mortgage lenders are required to conduct an escrow analysis annually to verify that they're not collecting too much or too little money. If you have an overage in your escrow account, an escrow analysis will reveal the surplus.
Homeowners' insurance and property tax costs can fluctuate, making escrow analyses particularly helpful. If your tax billor insurance premiums have changed, your lender may need to adjust your mortgage payment amount to reflect an increase or decrease in the amount you pay into escrow.
If your yearly escrow analysis determines that your escrow account has a shortage, or not enough money to pay your upcoming bills, your lender will notify you. You may be given the option to make a lump-sum payment to cover the shortfall or spread the shortfall amount across multiple monthly mortgage payments.
Alternatively, an escrow analysis may reveal that you have an excessive amount of money in your escrow account. If so, your lender may be required to refund the overage. Your lender will also adjust your monthly payment amount so you're not continuing to overpay moving forward.
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Why might you get an escrow refund?
Here are a few scenarios that could result in you being due an escrow surplus refund:
Overestimation of expenses
Sometimes lenders overestimate the cost of homeowners’ insurance and property tax costs, which could result in a surplusin your escrow account.
Homeowners insurance adjustments
Homeowners insurance adjustments could result in an excess amount in your escrow account. If you make changes to your homeowners' insurance policy, and your premium decreases, you may be entitled to a refund.
Property tax adjustments
Property tax adjustments may result in an escrow refund. For example, if a property tax assessment lowers your tax bill, you may get a refund for the amount you overpaid into your mortgage escrow account.
Refinancing
When refinancing your home loan, you’ll likely get an escrow refund. In most cases, lenders can’t transfer an escrow account balance. Your lender will issue a refund for any extra money left in your escrow account.
If you’re due a refund, you may want to hold onto your escrow check. It can be helpful to pay your taxes even if they’re not yet due when refinancing. Your escrow refund can help you prepare for these costs.
Unsure whether to refinance your mortgage? Better’s refinance calculator can help you determine if a refinance is ideal for your situation.
Mortgage payoff
You may be eligible for an escrow refund once you have paid off your mortgage. Once this happens, your lender will no longer be required to collect escrow payments, and you’ll pay your homeowners' insurance and property tax bills yourself.
If you have money in your escrow account after you make your final mortgage payment, your mortgage company will issue a refund.
How do you get escrow money back?
Do you get escrow money back, and if so, how does the refund process work? You'll receive a refund for surpluses of $50 or more. If an escrow analysis reveals a surplus, your lender will likely mail you an escrow refund check.
But how escrow refunds are handled and how quickly refunds are issued can vary by lender. You may be given the option to receive a direct deposit payment instead of a paper check. It's worth noting that for surpluses of $50 or more, lendersare required to issue a refund within 30 days. Therefore, expect to receive a refund within a few days to a few weeks.
If the surplus is less than $50, your lender can choose how to handle the refund, such as refunding you directly with a check or crediting the amount against the following year's escrow payments. If you have specific questions about your surplus, contact our lender directly.
How can you use your escrow refund?
You get to decide how you spend your escrow surplus check.
Unsure how to spend the excess funds? Here are a few options to consider:
- Emergency fund: Having extra money stashed away for unexpected expenses is a great way to prepare financially. Consider using your refund to establish an emergency fund or increase your existing fund.
- Pay off debt: If you have outstanding debt, consider using your escrow refund check to pay down or eliminate it. This strategy can help you save money on interest and improve your financial wellbeing.
- Make an extra payment toward your mortgage: You could apply an extra payment to the principal of your home loan. By making a principal-only payment, you can reduce your loan balance faster and save money on interest.
- Invest in home improvements: Another option to consider is using your refund check to help cover home improvement costs. Escrow refund check amounts vary, but even if you're receiving a small refund, it may still be possible to fund minor home updates, such as repainting a room in your home or updating a light fixture.
Escrow refund FAQs
How long does an escrow refund take?
Mortgage servicers must issue a refund within 30 days for escrow surpluses of $50 or more. If you're due a refund, you can expect payment within 30 days of being notified of the findings of your escrow analysis.
Do you get an escrow refund every year?
No, you don’t get an escrow refund every year. You will only get a refund if an escrow analysis reveals a surplus escrow balance.
Do you have to pay taxes on an escrow refund?
No, you don't have to pay taxes on an escrow refund. Since an escrow surplus check is a refund of money that you paid to your mortgage lender, the money isn't taxable.
Conclusion
It's common practice for mortgage lenders to set up escrow accounts for borrowers to hold and manage the funds needed to pay homeowners' insurance premiums and property tax bills. There are many situations where your escrow accountmay have an escrow surplus.
If you're a homeowner considering buying again or are contemplating refinancing your home loan, it's helpful to understand what an escrow surplus is and how escrow refunds work, so you know what to expect.
Better can help you manage these next steps when refinancing your mortgage or buying a home. Better presents clear refinance options and offers pre-approval in as little as three minutes.
Considering a refinance? Review current refinance rates to see if a refinance is ideal for your situation.
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