What is an Escrow Refund?
When you buy a home, you’ll most likely hear you need to maintain an escrow account with your mortgage company. Some people get confused when they hear this because there are two different accounts with an escrow meaning for each you’ll be dealing with — one before you close and one after. Before you close, you’ll put your earnest money (the money to hold the house before closing) into an escrow account. At the time of close, the escrow balance is returned to you.
The other type of escrow account you’ll need is an account set up by your mortgage provider to pay your property taxes and homeowner’s insurance bills after your mortgage closes. You’ll make escrow payments to this account regularly, and your mortgage servicing company will use those funds to pay the bills for you.
But on occasion, you may end up with more money in the escrow account than you need to pay those bills. There is a multitude of reasons that this may happen from time to time. When it does happen, you are eligible to get an escrow refund. By following the right steps, you can request that your mortgage service provider return those excess funds.
What is an escrow account?
After you close on your mortgage, your mortgage servicing company will set up a bank account known as an escrow account. The purpose of this account is to hold funds to pay your property taxes and your homeowner’s insurance bills. The company does this to help protect its interests in your home by ensuring you’re paying the necessary bills on time.
Further understanding “what is an escrow account” starts with understanding the terminology. The term escrow means a third-party holding an item and then acting on the item when certain conditions are met. In this situation, the bank is the third-party holding your money and pays your bills when it’s time to collect.
The Real Estate Settlement Procedures Act (RESPA), which was passed by Congress in 1974, governs escrow accounts. The act allows the mortgage company to keep 1/12th of your payments for property taxes homeowner’s insurance premiums. Additionally, it does allow the company to keep up to two months’ worth of additional escrow payments as a safety net to ensure bills are not delinquent.
What is an escrow refund?
Because of RESPA, escrow funds are limited in the amount of your money that can be kept in there. When the amount of money in the account exceeds the next payment plus two months of payments, you are eligible to ask for that money back. RESPA goes further to say that the overage must be greater than $50 for you to request a refund. If it is less than that, the mortgage servicing company can hold onto the money to use towards future bills.
Additionally, escrow refunds may happen when you pay off your mortgage completely. The remaining funds in the account must be returned to you. Some states also pay interest on funds in escrow accounts, which can create a surplus and a need for a refund.
Some of the more common reasons for escrow refunds outside of the aforementioned include tax bills lowering, changing insurance companies for a better rate, overpayment at the time of purchase, or the same bill being paid by you and the mortgage company and the balance being returned to the company.
There are no limits on the size of the refund you can receive, which makes sense, as it is your money. The only limitation is that the amount must be over $50. RESPA requires the lender to return the funds to you within 30 days after the analysis and identifying the overage.
How to calculate escrow amount
Calculating your escrow refund is quite simple in most situations. First, you need to figure out what your monthly escrow payment should be. Your payment is a combination of your property taxes and homeowner’s insurance bills. As these numbers are annual, you need to divide each by 12 to get the monthly rate. Once you do that, add them together, and you have your monthly escrow payment amount.
The next step is to consider the cushion amount that the lender is allowed to keep under RESPA. This amounts to two months worth of payments. Take your monthly payment and multiply it by three to account for next month’s payment plus the two-month cushion. The amount you get here is the total amount the mortgage servicing company is allowed to keep in your escrow account.
Take this number and compare it against the actual balance in the account. If the amount in the account is $50 or higher than the amount you figured, you may be eligible for a refund. Again, there are no limitations on the amount of the refund you can get. The only limitation is that it must be greater than $50.
If you’re not in a hurry to get the funds back, you can always wait a few months. Most mortgage lenders do an escrow analysis a few times a year, and the company will notice the overage. But if you want your money now, you are entitled to it under RESPA and can request it by contacting your mortgage servicing company.
Escrow accounts are a convenient way for all parties involved in the loan process to ensure that the necessary bills that need to be paid to protect the property are paid on time. Because the money in the account is for future payments, things can change, and there can become a surplus of money in the account. If you find that the balance is higher than what you’re required to keep on-hand, you can always contact the lender and request an escrow refund. The company will have 30 days to comply, as long as the overage is more than $50.