Escrow balance too high? Ask for an analysis
If you pay your property taxes and homeowners insurance to your mortgage company in monthly installments, the money goes into an escrow account (also called an impound account) until the bills are due.
Sometimes that account can end up with too much money in it.
Fortunately, there’s an easy way to get the excess back.
The company that services your mortgage determines how much you must contribute to your escrow account each month by dividing the annual cost of your homeowners insurance, property tax and, if applicable, lender-required flood insurance by 12. Servicers also take into account the minimum balance they require borrowers to keep at all times.
Servicers can choose whether to require a minimum reserve, but they cannot maintain a cushion of more than two months’ worth of tax and insurance payments per federal regulations.
This cushion is in addition to the amounts that need to be in the account to pay the tax and insurance bills on time.
There are several ways that borrowers can end up with too much money in a mortgage impound account:
- This year’s property tax bill is lower than last year’s.
- The homeowner changes hazard insurance companies and gets a lower rate.
- The homeowner drops optional additional coverage on their homeowners insurance, resulting in a lower rate.
- The homeowner overpays his or her escrow deposits at the time of purchase or refinance.
- Both the homeowner and the mortgage servicer pay the same bill, and the duplicate payment is returned to the servicer, not the borrower.
Homeowners can quickly get a general idea of whether they might have too much in an escrow account by performing the following calculation:
- Step 1. Take the current balance and subtract the amount of the next property tax bill due.
- Step 2. Subtract the amount of the next homeowners insurance bill due.
- Step 3. Subtract the amount of the next flood insurance bill due, if applicable.
- Step 4. Subtract an amount equivalent to two months’ worth of deposits.
If there is money left at the end of this calculation, the borrower might be entitled to a refund of the excess.
Getting a refund is simple. Simply contact your lender and ask for an analysis.
If you are correct that there is a surplus, the lender is required to send you a check within 30 days if the surplus is $50 or more. Your monthly mortgage payment might also be adjusted downward slightly.
If you aren’t in a hurry to get your refund (say, because it’s a small amount of money), just wait a few months -- lenders usually perform an analysis once or twice a year whether you ask them to or not.
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