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

When it comes to homeownership, the idea of receiving a refund of any kind is exciting. After all, you have the inevitable bills that come along with homeownership.

That’s why an escrow refund can present an enticing prospect. Although escrow refunds are relatively rare, these welcomed transactions do exist! Let’s take a closer look to uncover exactly what an escrow refund is. Plus, when you could expect to receive one.

What is an escrow refund?

An escrow refund occurs when your escrow account contains excess funds and you receive a check in the amount of any remaining balances.

Importantly, you may not be eligible for an escrow refund unless the remaining balance is at least $50. If the escrow account has a surplus of less than $50 at the time of the annual escrow account analysis, then the loan servicer has the option to refund the excess. But the loan servicer could choose to apply the excess against the next year’s escrow payments instead.

However, if there is surplus in the escrow account after you finish paying off the loan, you will be entitled to an escrow refund regardless of the amount.

What is an escrow account?

A refund of any kind sounds great. But in order to fully understand what an escrow refund is, it is critical to understand what an escrow account is.

As a homeowner, there are two ways that escrow accounts are generally used in real estate. First, an escrow account can be used to hold your earnest money deposit in the closing process. In this case, you make a significant deposit to show your seriousness in the property. It’s applied to your down payment or other closing costs if your transaction is completed. A third party holds the deposit in a specific escrow account.

The second way that an escrow account is used is as a secure place to hold funds intended to cover insurance and taxes. If you are a homeowner who took out a mortgage to finance your home, then you’ve likely come in contact with this usage of an escrow account. Essentially, an escrow account is an easy way to manage your property taxes and insurance premiums.

As a mortgage loan holder, you likely make monthly mortgage payments that include funds for your loan principal, interest, property taxes and insurance. As you make these monthly payments, the loan servicer will set aside a portion of your mortgage payment and hold it in your account to cover taxes and insurance payments associated with the property. For example, your homeowners insurance will be paid out of the escrow account.

When do you get an escrow refund?

Escrow refunds can occur in a variety of situations. Although the details will vary based on your particular situation, here are a few instances in which you might be eligible for an escrow refund.

• Paid off mortgage completely: If you have a remaining balance in your escrow account after you pay off your mortgage, you will be eligible for an escrow refund of the remaining balance. Servicers should return the remaining balance of your escrow account within 20 days after you pay off your mortgage in full.

• Lowered tax bills: Tax bills may change on a year-to-year basis. If your property tax bill is lowered, there is a chance you’ll receive an escrow refund.

• Insurance companies changed for a better rate: If you are able to switch up your homeowners insurance for a better rate, then you might be eligible for an escrow refund. When switching homeowners insurance policies, you’ll want to contact your servicer. They’ll need to know about your new policy. You should also know that homeowners insurance policies are paid in advance, so if you don’t send your refund check from the previous carrier back to your servicer, you’ll likely end up with an escrow shortage because you’ll have paid out of that account for two separate policies. You’ll want to make an escrow-only payment in the amount of the refund to avoid shortage.

• Overpayment when purchased: If you made a larger than necessary upfront payment at closing, then you may receive an escrow refund.

What Are Escrow Refund Checks?

An escrow refund check will reflect the amount of excess funds in your escrow account.

If you are eligible for an escrow refund check, the loan servicer will most likely issue a check after its required annual escrow account analysis. The timing can be any month of the year, but during this review loan servicers check that your escrow payments match up with the bills paid out of this account.

For example, let’s say that your property tax bill was lowered in July. Since then, you’ve consistently paid your entire mortgage payment. With that, you should have extra funds in your escrow account when an annual escrow account analysis is conducted in December. At that point, the loan servicer may issue a refund check. However, it is possible that you’ll need to make a request to receive the refund check. Finally, you have to be current on your mortgage to receive the refund.

What Is A Refinance Escrow Refund?

When you refinance your mortgage, you may be able to tap into a lower monthly payment. That decision could result in an escrow refund.

If you are refinancing your mortgage with your current lender, then your escrow account may remain intact. That means that the funds you have in your account before the refinance will remain in the original escrow account. With that, you shouldn’t expect to receive an escrow refund unless the property taxes or insurance associated with your property have changed dramatically.

However, things change if you are refinancing with a different lender. When you complete the refinance with a new lender, the new loan servicer will create a new escrow account for you. With that, your original escrow account will be closed. If the original escrow account is closed, then you should receive a check for the remaining balance.

What Is An Escrow Balance Refund?

An escrow balance refund is a check for the entire remaining balance in your escrow account. Essentially, this is an escrow refund, but instead of receiving a portion of the balance, you will receive the entire balance remaining in your account.

This transaction can come into play if you’ve paid off your mortgage and there is still a balance in your escrow account.

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

An escrow account helps take the pressure off of your budget when planning to pay big-time annual expenses such as your property taxes or insurance. Instead of being surprised by a bill, your lender will set aside part of your mortgage payment each month to make sure these bills are covered. An escrow refund allows you to reclaim the excess funds stored on your behalf by a loan servicer.

Current Rocket Mortgage^® clients looking for information on the status of their escrow account can visit our servicing portal.

If you’re beginning the home buying or refinancing process, we’re here to help. Get preapproved today to see what you can afford or give us a call at (833) 326-6018.