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Netting Escrows: What Does It Mean, And Should You Net Escrow?

Sarah Sharkey3-minute read

November 28, 2022

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During a refinance, netting escrows is an effective way to lower the principal balance on your new mortgage loan. Let’s take a closer look at how to take advantage of this option.

What Does Netting Escrows Mean?

Netting an escrow only happens if you decide to refinance your home loan, and it allows you to take the money in your existing escrow account and apply the balance as a credit toward the payoff of the new loan.

It’s necessary to understand what escrow is too. Essentially, escrow is your money that’s put aside at the start of a mortgage (and as part of each monthly payment) to ensure property taxes or homeowners insurance premiums are always paid on time.

An escrow account provides a helpful way to have these expenses covered ahead of time by cash you put aside, so you aren’t surprised with a big bill that you have to cover on top of your mortgage payment and other bills. During a refinance, some lenders will allow you to put the funds sitting in your existing escrow account toward the loan’s principal balance.

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How Does Netting Escrow Affect Your Refinance?

When you refinance, escrow netting allows you to apply the account’s balance to the payoff amount of your existing loan. In other words, netting escrow can help you lower your principal balance for your refinanced mortgage.

Let’s consider an example.

Sally is refinancing her mortgage with an outstanding balance of $100,000. Within her existing escrow account, she has $1,000 stored. She decides to pursue netting escrow. With that, the principal balance on her new loan is $99,000.

On the other hand, Bill is refinancing a mortgage with a $100,000 loan balance. He decides not to pursue netting escrow with the $1,000 in his escrow account. With that, the principal balance on his new loan is $100,000, and he gets a check for the amount in his old escrow account.

Sally’s choice to pursue netting escrows led to a lower principal amount. Ultimately, this can mean a lower monthly payment if the interest rate and loan terms remain the same.

Keep in mind that netting escrow isn’t an option for every type of refinance. The Federal Housing Administration (FHA) allows FHA loans to net escrow when refinancing, but not all mortgage companies do (Rocket Mortgage® does not). Make sure you check with your mortgage provider to see if you qualify for this. When it comes down to it, you’re going to have to pay for escrow when you refinance, and it’s a better deal to net it.

Should You Net Escrow?

If you are refinancing, a net escrow is a useful opportunity to consider. But like all financial choices, there are advantages and disadvantages. Here’s a closer look at what you should keep in mind.

Benefits Of Netted Escrow

When you refinance, you have two options with your old escrow account: you can pay the new escrow amount out of pocket and receive a check for the old escrow account after the payoff, or you can net (or apply) the escrow and use your old account funds to cover the difference for your new escrow.

The new escrow in your refinanced mortgage is going to be a part of mortgage costs either way, so if you don’t have the cash at hand to cover it at that moment, netting your escrow is extremely helpful.

Beyond that, netting escrow can lower your principal balance for your new mortgage. Ultimately, a lower principal amount can help you save a borrower money over the loan term.

Drawbacks Of Netted Escrow

The disadvantage of netting escrow is that you won’t receive a reimbursement check with your original escrow balance refund. You won’t hold the funds in your hands at all. Instead, the funds are sent ahead to help you with your next mortgage.

The Bottom Line

Netting escrow could be the right move for your finances during a refinance. But it’s not an option with every lender. If you are ready to move forward with a refinance, start a mortgage application with Rocket Mortgage to see if you qualify.

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Sarah Sharkey

Sarah Sharkey is a personal finance writer who enjoys diving into the details to help readers make savvy financial decisions. She’s covered mortgages, money management, insurance, budgeting, and more. She lives in Florida with her husband and dog. When she's not writing, she's outside exploring the coast. You can connect with her on LinkedIn.