Escrow refund: What is it and how does it work
Quick insights
- Escrow refunds occur when your mortgage lender collects more money than necessary to cover things like your property taxes and homeowner’s insurance.
- Typically, escrow refunds happen when your escrow account balance ends up higher than required after the annual review.
- While not guaranteed, escrow refunds might occur in some years depending on changes to your property taxes or insurance costs.
Imagine this: One afternoon, you open your mailbox to find a check from your mortgage provider. Initially, you’re wondering if it’s a mistake. Did you overpay your mortgage? Not exactly. What you’re holding may be an escrow refund. For many homeowners (especially first-time homebuyers), it can feel like finding forgotten cash in your winter coat pocket. But where did this money come from?
In this article, we will cover how escrow refunds work to help you better manage your mortgage and know what to expect if you ever receive one.
What is an escrow refund?
An escrow refund, sometimes called an escrow overcollection, is money that might be returned to you if your loan provider collected more than what was necessary in your escrow account to help cover your property taxes and homeowner’s insurance. Throughout the year, part of your monthly mortgage payment goes into this account, which your lender uses pay tax and insurance bills on your behalf. If there is more money in your account than required, you could receive the extra amount in the form of a check or direct deposit.
When do you get an escrow refund?
You might receive an escrow refund after your loan provider completes an annual analysis of your escrow account.
- Timing of refunds: Refunds are generally sent after the annual escrow account analysis, which may be the end of the year but depends on your lender.
- Notification process: Your mortgage lender typically sends you a statement showing the analysis and any surplus funds you might be owed.
- Factors affecting timing: Changes in property tax rates or homeowner’s insurance premiums can potentially impact the refund’s timing and amount.
- Regular occurrence: While not guaranteed every year, refunds could happen in multiple years if your escrow account has a surplus.
Reasons for an escrow refund
There are various factors that might lead to an escrow refund. In most instances, it happens when your escrow account ends up with more funds than needed to cover property taxes and homeowner’s insurance. Some of the more common reasons can include:
- Overestimation of costs: If your mortgage lender estimated your property taxes or insurance premiums to be higher than the actual numbers that year, you could end up with surplus funds after all bills have been paid.
- Decrease in expenses: If your property taxes or homeowner’s insurance premiums decrease (maybe due to reassessment or a new insurance rate), you might see a surplus of money in your escrow account. For example, if your property taxes are reassessed and drop from $5,000 to $4,500 per year, or if your homeowner’s insurance rate decreases from $1,200 to $1,000 annually, your escrow account may end up with additional money that can be refunded to you.
- Changes in insurance coverage: Switching to a less expensive homeowner’s insurance policy or receiving discounts on your current policy can reduce costs and create extra funds in your escrow account.
- Lender error: While this is rare, an incorrect calculation of your escrow payments by your mortgage lender could lead to overcollection and a potential refund.
What can you do with an escrow refund check?
If you receive an escrow refund check, there are multiple ways you can use the money. It depends on your financial goals, but here are some ways you may consider utilizing an escrow refund:
- Apply it toward your mortgage: You might choose to make an extra principal payment, which could help reduce your loan balance over time.
- Set it aside for future housing expenses: Putting the money into a savings account can give you a cushion for future tax or insurance increases.
- Cover home maintenance or upgrades: You could use the money for repairs, home improvement renovations or upgrades that add value to your home.
- Pay down other debt: Applying the refund toward high-interest credit card balances, personal loans or other debts might help lower your interest costs.
- Boost your emergency fund: Adding the escrow refund to your personal emergency savings can provide peace of mind for unexpected expenses.
What is a refinance escrow refund?
A refinance escrow refund is money you might receive after refinancing your mortgage. When you refinance your mortgage, your old loan provider closes out your existing escrow account and returns any remaining balance to you. Since your new loan typically comes with a new escrow account, the refund represents funds that were not needed to cover property taxes or insurance under the old loan.
In summary
Whether from overestimated costs, a refinance or change in expenses, escrow refunds can put unexpected funds back in your pocket. While an escrow refund is not guaranteed, it’s key to understand how they work and ways for you to make the most of any refund you might receive. It’s important to review your lender’s statement carefully or reach out with questions, so you can understand exactly why you’re receiving the funds.
