If you are concerned about escrowed funds that might not get credited toward your loan balance before completing a refinance transaction, there may be hope. Mortgage servicers are required to return unused portions of a borrower’s escrow balance within 30 days of receiving a final loan pay off. If you’re in the process of refinancing, you can call your mortgage servicer to obtain additional details.
Escrow accounts provide an easier method for managing your property tax and homeowner's insurance payments. The premium for a homeowner’s insurance policy is generally paid on an annual basis; however, property tax bills are typically paid annually or semiannually. If you have an escrowed mortgage payment, your mortgage payment consists of a principal and interest payment, as well as an escrow for property taxes and homeowner's insurance. Your loan servicer will retain the escrow portion of your monthly mortgage payment until receiving an invoice for your property tax or homeowner's insurance bill. A payment is made from your escrow account to satisfy invoices as they become due.
Refinancing your home loan could lower your current mortgage payment while consolidating other debt, if the available equity within your home meets certain lending requirements. If you are refinancing with your current home lender, your escrow account may remain intact. However, if you are refinancing with another lender, your current escrow account will be closed, and you should receive a check for the remaining balance within 30 days of paying off your former lender.
You might be required to establish a new escrow account before receiving the proceeds from your prior escrow account. Your new lender may collect more than six months' worth of escrow funds to prepare for upcoming property tax or homeowners insurance bills. The actual amount collected depends on the time that remains before your tax and homeowner's insurance bills are due. During a refinance transaction, your new mortgage lender could use allowable portions of your home equity to fund your escrow balance, thus eliminating a need for you to pay out-of-pocket costs at the settlement table. However, if the equity does not exist, you may need to pay a prorated portion of your escrow requirements. Some mortgage lenders may require an additional two-month cushion toward the creation of your escrow account. Due to escrow adjustments -- generally caused by changes within your tax bill or homeowner’s insurance premium -- your lender uses the cushion as a safeguard.
When refinancing, a new escrow account could add unexpected expenses toward your total debts. To mitigate some of the added costs, you may want to consider using your escrow refund to apply toward your new principal mortgage balance. You may have the option to establish or decline a new escrow account if there is greater than 20 percent equity remaining in your home, after completing your new loan. Use your new home appraisal to compute your loan-to-value ratio. Divide your new loan amount into the appraised value of your home. If your loan balance represents less than 80 percent of your home’s value, you’ll avoid private mortgage insurance requirements and you can speak with your lender about escrow options.
Ray Cole has written professionally since 1999 and has designed dozens of Web sites. Cole writes for eHow and "SF Gate." As a small business owner for over 15 years, he provides mortgage services, credit-related help and financial planning for his clients. Cole is currently writing a book about personal finance. He has also studied and taught martial arts for over 31 years.