If you, as a mortgage holder, have money in an escrow account, you may see an escrow refund after an escrow analysis at the end of the year. It may not happen often, but an escrow refund check comes if there’s an excess amount in your escrow account. Regulations set by the Consumer Financial Protection Bureau (CFPB) allow the mortgage servicer to retain two months’ worth of your escrow payment as a cushion. Amounts greater than $50 above the cushion should be refunded to you. Escrow balances less than this amount can be retained in the escrow account for the next year or refunded to the borrower.
Escrow refunds generally come when there’s an expense that’s smaller than expected, such as a lower insurance bill or fewer taxes. Your mortgage servicer pays the lower amount and then, when the servicer conducts an escrow analysis, the difference will be refunded to you, typically by check. The funds can also come when an escrow account is closed, such as when the mortgage is paid off or refinanced.
Here, you’ll learn more about escrow refunds, including:
• What is an escrow refund?
• How is escrow overage calculated and dispersed?
• When might you expect an escrow refund?
• How long does an escrow refund take?
The Escrow Process 101
You might have heard the term “escrow” in a couple of different settings when you’re buying a home. First, an escrow account is like a savings account that is set up for holding earnest money after you make an offer on a house.
And second, a different escrow account is set up by your mortgage servicer after you close on the loan. It can manage your taxes, private mortgage insurance (PMI), and/or homeowner’s insurance. The second factor is most likely to trigger a refund.
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In its simplest form, the escrow process looks like this:
1. The mortgage servicer sets up an escrow account.
2. The borrower makes monthly payments to the mortgage servicer.
3. The mortgage servicer deposits the portion of the monthly payment for the homeowners insurance, taxes, and mortgage insurance into an escrow account.
4. The taxing entity, homeowners insurance provider, and/or mortgage insurance company send the mortgage servicer a bill.
5. The mortgage servicer pays the bill on the borrower’s behalf.
6. The mortgage servicer audits accounts every year to determine if there is an overage or a shortage.
7. If there is an overage above $50, the borrower can be refunded that money. The servicer will alter the monthly payment lower for the next year.
8. If there is a shortage, the mortgage servicer will modify your monthly payment to account for both the shortage in the last year and the increased cost for the upcoming year.
What Is an Escrow Refund?
An escrow refund occurs when you, as a mortgage holder, receive a check at the end of the year for the extra money you paid into your escrow account. This is a requirement of mortgage servicing.
When you start making monthly payments to your mortgage servicer, you’ll pay the same amount each month. This amount typically includes your principal, interest, property taxes, homeowners insurance, and PMI (if you have it). The portion designated for taxes, PMI, and homeowner’s insurance will go into your escrow account. This amount is saved until your bill is due. The mortgage servicer pays the bill and deducts the amount from your escrow account.
Every year, the mortgage servicer is required to conduct an escrow analysis. This is a process where the servicer looks at the deposits made by you as well as the bills for insurance and taxes. Adjustments are made, and if you overpaid, you get a refund.
Escrow Refunds at Closing
You also might be wondering, “Do you get escrow money back at closing?” The process for escrow refunds at closing is a little different.
• Your lender typically uses the money from your existing escrow account to apply toward your down payment or closing costs.
• Then, for the new escrow account opened by your mortgage servicer, you will contribute what are called “prepaid closing costs” to the account to fund your escrow account. If you end up paying too much, you’ll see an escrow refund check from your servicer after an escrow analysis has been performed.
Mortgage servicers like escrow accounts because it helps protect their investment in your home. When the homeowner’s insurance is paid, the lender can be assured there is protection for the home should anything happen to it. Likewise, when the taxes are paid, the lender doesn’t have to worry about the taxing entity placing a lien on the home.
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When Might You Expect An Escrow Refund?
Mortgage servicers are required to complete an escrow analysis at the end of the escrow account computation year, according to Regulation X of the Real Estate Settlement Procedures Act (RESPA). After the yearly escrow analysis, you will receive an escrow account statement. This statement will show you the deposits and expenses for the year, as well as show you a projection of anticipated expenses for the upcoming year.
It will also notify you of changes to your monthly payment that need to be made. These steps help ensure that your mortgage servicer is able to pay your taxes and insurance in full from your monthly payment. It’s common for the amount to change a bit from year to year.
If the escrow analysis uncovers a surplus above the allowable cushion in your escrow account, you can expect a mortgage escrow refund within 30 days.
Here are some common scenarios where you might expect to see a refund from your escrow account.
When you pay off your mortgage or refinance with a new low interest mortgage loan, your mortgage servicer is no longer required to hold an escrow account for you. You may receive a refund from your escrow account for any unused funds.
Lower Tax Bill
If your tax bill decreases, that means the amount collected from your monthly mortgage payment over the year will be more than what is actually due. The excess amount in your escrow account could be refunded to you after escrow analysis.
Better Insurance Rate
If you change your homeowners insurance to a company that offers a better rate, you may be due a refund. If this happens, you’ll likely pay the higher premium that you had locked into your monthly payment for the year. However, once the escrow analysis is completed at year’s end, the savings will be apparent and you should receive your refund.
Private Mortgage Insurance No Longer Required
On many conventional mortgages, there may come a time when you don’t need to pay for mortgage insurance. Let’s say you were a first-time homeowner who put less than 10% on your house. When your home equity reaches 20%, you may be able to have the private mortgage insurance premium removed (depending on the type of mortgage you have).
This may happen in the middle of the year before your servicer expects it. Your monthly payment may not be adjusted until an escrow analysis is completed at the end of the year. After an analysis has been completed, you’ll likely receive a refund because you’ve been overpaying for that mortgage insurance you no longer need.
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If you overpaid for an escrow item when you closed on your home, the surplus can be refunded to you after an escrow analysis.
When You Won’t See an Escrow Refund
The part of your monthly mortgage payment that goes toward your escrow account is set at the beginning of the year. However, tax rates and insurance rates often increase during the year. When your tax or insurance bill is due, your escrow servicer will pay the larger bill even though there isn’t enough money in the escrow account to cover it. This may result in a negative escrow balance.
In the case of a negative escrow balance, the servicer uses their own money to cover the shortfall. To make up for the shortage, the servicer will make adjustments after completing escrow analysis and take steps to collect the shortfall. The adjustment will also account for the new increased amounts due monthly during the upcoming year.
How Soon Can I Expect a Refund?
For ongoing mortgage payments: Your escrow servicer is required to issue a refund within 30 days of discovering a surplus of $50 or more. (This surplus is above a two-month allowable cushion of escrow payments that your mortgage lender may hold.). Borrowers must be current on their mortgage payment, however, to be able to receive this refund.
If you pay off your mortgage: Your escrow servicer may refund the balance of your escrow account within 20 days. Or, if your new mortgage is with the same servicer, the servicer can apply the balance of the escrow account to a new escrow account with your permission.
You may see an escrow refund coming your way if you’ve negotiated a better deal for your homeowners insurance, expect to pay less in taxes, or no longer need to pay PMI. It will happen automatically because your mortgage servicer is required to perform yearly escrow analysis. You’ll also receive a refund if you pay off your mortgage and possibly when you refinance. Once that happens, the servicer has 30 days or less to refund the money you’re owed from your escrow account.
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When you’re ready for a new mortgage, a refinance, or a home equity loan, SoFi is here to help.
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