Escrow refund: What is it and when does it occur?

When you buy a home, your mortgage lender sets up an escrow account to hold money for expenses like property taxes and homeowners insurance, so you don’t have to juggle those big bills on your own. Sometimes you end up with surplus funds from this account and you may be entitled to an escrow refund.

Knowing when and why escrow refunds occur will help you plan for any money you may receive back from your mortgage lender.

What is an escrow refund?

An escrow refund is excess money returned by your lender from your mortgage escrow account. This surplus typically occurs when you pay too much toward your escrow account or your mortgage lender overestimates the amount you’ll need for property taxes or homeowners insurance payments.

Your lender will typically refund you the excess escrow balance by mailing you a check and notifying you in writing about the status of the account.

In some cases, you may not be eligible for an escrow refund if your remaining balance falls below a certain amount. For example, some lenders may not refund you excess funds unless the amount is $50 or more.

Your mortgage lender could also choose to apply the excess amount toward next year’s escrow payments instead of refunding you the money. For example, if you had an extra $500, your lender could roll that over to put it toward your insurance and tax payments for next year.

If you fully paid off your mortgage and there is a surplus in your escrow account, you’re entitled to that amount no matter what the balance may be.

What is an escrow account?

An escrow account is set up by a third party used to hold money for a specific use. When someone buys a home, an escrow account is used to hold their earnest money, which will go toward the down payment or closing costs if the home sale goes through.

When it comes to mortgages, your lender sets up the escrow account. This money is held until it’s time to pay your homeowners insurance or property tax payments each year. Your lender will estimate how much you’ll need and divide it into 12 payments to make it more manageable.

The escrow account is also required to have some extra funds as a cushion, typically up to 2 months’ worth of payments. The lender will need to comply with the amount required by the Real Estate Settlement Procedures Act (RESPA) or state law, unless it specifies differently in your mortgage contract.

Each month, your payments will include this amount, plus money toward your loan principal and interest. Whenever your homeowners insurance and property insurance are due, your lender will take the appropriate amount out of the escrow account and make payments on your behalf.

When do you get an escrow refund?

When you receive an escrow refund can happen any time of the year, typically when your mortgage company does a review to see whether your escrow payment matches up with the money you owe in insurance and tax payments.

Mortgage lenders do their best to estimate how much money you’ll need in order to pay your homeowners insurance and property tax payments. There may be occasions, however, that are outside their control which can lead to surplus in your escrow account.

Common scenarios that can lead to an escrow refund include:

• Mortgage payoff: You’re eligible for a refund for the remaining balance in your escrow account after paying off your mortgage. Your mortgage lender should give you a written notice of the loan closure and how much you’ll be refunded. You should receive your escrow refund within 20 days of paying the mortgage in full.
• Annual escrow analysis surplus: When your lender’s annual review finds that there is more money in the escrow account than needed, you may either receive a refund or have the balance carry over to the next year’s payment. Each state will have different times of the year when lenders have to conduct their escrow analysis. Arizona and Indiana conduct theirs in September, for example, whereas Maine and Michigan have theirs in October.
• Refinancing: When you refinance your mortgage with a new lender, any extra money in the escrow account could be refunded to you. In some cases, your old lender will transfer the funds to your new lender’s escrow account.
• Reduction in property taxes or insurance premiums: If your homeowners insurance premium went down in the last few months or your property taxes went down, you could end up having a surplus in your escrow account. Maybe you shopped around insurance carriers and switched to one with a lower rate. You may still be making escrow payments based on the old rate, leading to a surplus. 

One common example of when you would receive an escrow refund is if you sold your home. The official closing happens to be several weeks until your homeowners insurance renewal. Up until this point you’ve been making escrow payments, with the assumption that this amount will go toward your insurance premiums.

After the closing, your mortgage servicer sends you written notice that your loan has been paid off in full, including the excess amount you’ve paid toward your escrow account. Within the specified amount of time, you should receive a check in the mail with the amount you’re owed.

How are escrow refunds issued?

Exactly when you receive your refund will depend on the status of your mortgage. If you’ve closed on your current loan, whether through refinancing or selling your house, you’ll receive a check within 20 business days.

Escrow refunds $50 and higher that don’t have to do with a mortgage payoff tend to take a bit longer. After conducting an escrow analysis, your loan servicer will send you a check for the surplus within 30 days. This assumes that you’re current on your loan payments. Lenders have the right to hold onto escrow funds and keep them in surplus if you don’t make a payment within 30 days of the due date.

What should you do with an escrow refund?

The money refunded is yours to do with as you wish. Some ways you can use it toward housing costs include:

• Extra payment toward your mortgage principal: Putting your excess escrow funds toward bringing down your loan balance can save you on interest costs and get you to debt-free status sooner.
• Pay for home maintenance costs: Most homeowners pay around 1% – 4% each year toward home maintenance costs, which can include minor repairs like fixing a faucet or bigger purchases like replacing a washing machine. Having this money on hand means you’re prepared when something in your home needs your attention. Consider setting this money in a separate savings account (ideally one that earns higher than average interest) so you know it’s earmarked for home maintenance.
• Save for future escrow payments: You could ask your loan servicer to roll over the excess escrow payment to next year’s payments. Or, you can hold onto your refund in a separate savings account and use it toward the escrow part of your mortgage payment.

Of course, you may have other financial goals that you can use your escrow refund toward. Having a fully funded emergency fund is a worthwhile investment, as it can help you prepare for any unexpected scenarios like a job loss or a medical emergency. So if the escrow refund could help you get closer to the amount you want, then it’s worth considering putting the money toward this goal.

You can also consider short-term goals like setting aside money for the holidays or paying down high-interest debt like credit cards.

If, for example, your escrow refund was for $3,000 and you have a balance of the same amount on one of your credit cards, paying that off could save you hundreds of dollars in interest.

Whatever you choose, take the time to see where your escrow refund will make the most impact before cashing in your check.

FAQ

We’ve gone over many details about an escrow analysis, including time frames and possible usage of refunds. But you might still have questions. We have answers.

Can I request an escrow refund if I believe there's a surplus?

Yes, you can request a refund if you think there’s a surplus. Contact your lender to request an escrow analysis and if there are extra funds, you can ask for the money to be returned to you.

What happens if there's a shortage in my escrow account?

Sometimes you may experience a shortage of funds on your account. This can happen if your insurance policy went up unexpectedly or your property taxes increased.

In this case, your lender will find out about the shortage during their escrow analysis and send you a notice about the shortage. You’ll most likely see an increase in your monthly payments that will go toward the deficit. Or, you could make a lump-sum payment to make up for the difference.

Are escrow refunds taxable income?

No, escrow refunds don’t count as taxable income. That’s because the money is a refund of the money you paid to your mortgage lender.

The bottom line: Know the ins and outs of an escrow refund

Most lenders set up escrow accounts to hold funds to pay homeowners insurance and property taxes each year.

Sometimes you’ll have excess funds, whether it’s because of changes in insurance premiums, taxes, or you’ve sold your house. Escrow refunds are common when you’ve been overpaying into your escrow account.

It may be hard to predict when you’ll have a surplus in your escrow account, especially as insurance premiums can fluctuate, and you may not know how much in property taxes you owe until you receive a bill.

Still, you can check your escrow statement regularly. In most cases you can log in to your account online. You have a right to ask your lender about your escrow account, such as when it conducts its analysis or any potential refunds you may qualify for.

Rocket Mortgage® makes it easy for you to understand and manage your escrow account. Learn about how we determine your escrow amount and what happens if there is a surplus or deficit in your account.