The federal Real Estate Settlement Procedures Act generally requires a mortgage lender to issue you a refund of any excess money in your escrow account once that overage reaches $50. Anything less than that, it can keep in the account. But before you demand that your lender cut you a check, make sure you understand exactly what constitutes an overage.
In a typical escrow arrangement, your lender pays your home's property taxes and casualty insurance premiums on your behalf. The cost of these items is tacked onto your monthly mortgage payments. The lender sets that money aside in a separate escrow account and then pays the bills out of that account. For example, if your property taxes are $3,000 a year and your insurance premiums are $900, the lender might add a monthly escrow charge of $325 to your mortgage payment. Multiply $325 a month by 12 months a year, and $3,900 is put into your escrow -- enough to cover your taxes and insurance.
Your lender wants to ensure that there's always enough money in your account to pay the bills when they're due. Lenders usually require you to keep a little extra money in your escrow account at all times in case your taxes or premiums go up or you're late with a payment in the month a bill comes due. This extra amount is the "cushion." The Real Estate Settlement Procedures Act says that lenders can keep a maximum cushion of one-sixth of the total annual cost of items paid out of escrow. So if your taxes and insurance add up to $3,900 a year, your lender can keep a cushion of $650. Cushions are not overages.
Because property taxes and insurance premiums go up -- and, occasionally, down -- your lender examines your escrow account once a year, a process called escrow analysis. As part of the analysis, your lender adjusts your payments to ensure that the account will have enough money to pay the bills as well as a sufficient cushion. Your lender may discover during escrow analysis that the extra amount in your escrow account has grown larger than the allowable cushion. The amount in excess of the cushion is the overage. If the overage is $50 or more, the federal act requires the lender to refund the surplus to you within 30 days of the analysis. The lender can hold overages of less than $50 in the account.
Be aware that the cushion is not the maximum amount that your lender can hold in the escrow account at any one time. Rather, it is the maximum amount it can hold in the account above what's needed to pay any tax or insurance bills. For example, if the biggest escrow expense is a $1,000 property tax bill and the maximum cushion is $650, then the escrow account could have a maximum of $1,650. Any amount over that would be an overage. If the the account grew to $1,700 or more, the lender would have to refund the overage.