Escrow Refund: What Investors Should Know

Have you been wondering what happens during an escrow refund from your mortgage provider? Here’s what real estate investors need to know.

When buying your home, most mortgage companies will require you to open and maintain an escrow account. Most people are confused during this process since they hear of two escrow accounts involved during a typical real estate transaction.

Table of Contents

1. What Is an Escrow Account?
2. What Is an Escrow Refund?
3. What Are Escrow Refund Checks?
4. What Is a Refinance Escrow Refund?
5. What Is an Escrow Balance Refund?
6. How Do You Calculate Escrow Refund Amount?
7. How Do You Ask For an Escrow Refund?
8. How Long Does an Escrow Refund Take?
9. What Should You Do With Your Escrow Refund Check?

The first account is used before you close the deal. It’s used to hold the earnest money, which is returned to you after closing. Your mortgage lender requires the second one to facilitate the property taxes and the homeowner’s insurance after closing. 

You regularly make payments to the escrow account set up by your mortgage lender, and the mortgage company uses these funds to settle the bills for you.

What happens when the account has more money than is needed to pay the bills? While it may seem impossible, there are reasons why this may occur. In such cases, you should get an escrow refund. Nothing would make a new homeowner happier than being eligible for a refund. 

In today’s article, we gain a comprehensive insight into what this type of refund is and when you may qualify for one. But first…

What Is an Escrow Account?

Before we can look at an escrow refund, it’s great to get the basics first. Once you close on a property, your mortgage lender will set up a bank account. It is the account we refer to as the escrow account.

As we’ve seen, you send some money to this account regularly to help pay for property taxes and insurance. Instead of scheduling your bills and paying property taxes and insurance separately from a checking account, mortgage lenders collect these fees through installments as part of your mortgage payments.

Mortgage companies do this to protect their interest in your home by ensuring you’re paying your bills on time. The lender holds this money in your escrow account and pays the bills on your behalf.

The term “Escrow” generally means a third-party holding your money or an item and then carrying out a certain action upon meeting specific conditions. In this case, the bank with your money is the third party. You also don’t manage the escrow account by yourself.

Escrow accounts are governed by the Real Estate Settlement Procedures Act (RESPA), which has existed since 1974. The mortgage Escrow refund rules let mortgage providers keep 1/12th of your payments to cater for property bills. In addition, it allows the lender to keep an amount worth up to two months of additional escrow payments as a safety net.

What are the advantages of an escrow account? 

Advantages of an Escrow Account

Here are some advantages of having an escrow account with your mortgage lender.

• Automatically pay your bills- An escrow account ensures your bills are automatically paid when they’re due. This ensures you avoid penalties for late payments or losing your home. You don’t have to track your bills or worry about paying them.
• Protection in case of deficit– Property taxes and insurance premiums may fluctuate over time. However, an escrow account may offer some protection in case of shortfalls. For example, if the property tax bill increases and your account falls short, your mortgage lender may cover the difference temporarily. They may increase your monthly mortgage payments to compensate for it.
• Makes it easier to budget- Many homeowners find it easier to pay a certain amount of money to their mortgage lenders to cover their property bills. If paid separately, these bills can break your budget.
• Gives you peace of mind- It’s tough when you have to make separate payments for different bills each month. An escrow account lets you have peace of mind by simply making one deposit to the account.
• Avoid surprises- Your mortgage lender lets you know the amount of money you need to deposit to your escrow account each month. If property taxes increase, they’ll tell you in writing. The lender also sends an annual statement that includes all payments you’ve made, including overages and shortages.

While escrow accounts have many benefits, it doesn’t mean that they don’t have any cons. 

Disadvantages of an Escrow Account

These are some notable drawbacks of an escrow account:

• Less control- Some people love to have complete control over their finances and bill. If you’re one of those people, an escrow account may be uncomfortable. You might spend your time worrying about missing some payments.
• Missing out on interest rates- Some states require mortgage lenders to put escrow money in interest-bearing accounts. Unless you’re in such a state and want your money to grow, you might want to put that money in a savings account or invest in an income-generating venture.
• High monthly payments- Your mortgage payments will include property tax fees and homeowner’s insurance. It means you’ll be paying a huge amount every month, which might leave less room in your monthly budget.
• Large upfront deposits– To set up an escrow account, mortgage lenders often require homebuyers to deposit an amount equal to two or three months’ worth of property insurance and taxes. These requirements can significantly increase your closing costs.
• Potential inaccurate estimates– The amount you need to deposit into your escrow account depends on property taxes and insurance premiums, which are subject to change every year. Typically the previous year’s bills are used to calculate how much you’ll need. But, sometimes, incorrect estimates happen, for instance, if your home’s assessed value has increased.

Related: Escrow in Real Estate Investing: Everything You Need to Know

What Is an Escrow Refund?

Now that we’ve understood what an escrow account is, is escrow refundable? Yes, you can be eligible for an escrow refund. 

Basically, this happens when your account has excess funds sent back to you after sorting the property taxes and insurance premiums.

RESPA has a limitation on the amount of money that can be kept in an escrow account. The guidelines stipulate that the amount in the account isn’t supposed to be more than the next month’s payment plus two months’ worth of payments. If the amount exceeds, you’re eligible for a refund. 

The guidelines further state that the excess amount must be greater than $50 before requesting a refund. If the overage is less than $50, the mortgage lender can keep the amount in the account to service future bills.

Escrow refunds also happen once you’ve fully settled your mortgage repayment. If there’s a balance in the escrow account, it should be returned to you. Mortgage lenders should refund the amount within 20 days after finishing the mortgage repayment.

Other than the reasons mentioned above, here are some other instances that could make you eligible for an escrow refund:

Lower Tax Bills

Tax bills change every year. If the property tax bill is lowered, there’s a chance that you’ll receive an escrow refund.

Better Insurance Rates

You’re eligible for this refund if your change your insurance provider for one with a better rate or if your current one lowers your rates. Here are some reasons why your insurance provider might lower your rates:

• Improved policy to safeguard your home against natural disasters or fire
• Tied up auto policies with your property insurance policy
• You improve your credit score dramatically

When switching property insurance policies, you want to contact your insurance provider to get to know about your new policy’s details.

Also, know that property insurance policies are paid in advance. If you don’t send your escrow refund check to your new servicer, you might end up with an escrow shortage since you’ll have paid out of that account for two separate insurance policies. Make an escrow-only payment in the refund amount to avoid shortages.

If you receive an insurance rate discount, notify your mortgage servicer so they can know how to adjust your monthly payment properly.

Related: 10 Types of Insurance for Real Estate Investors

You Overpay at the Time of Purchase

In some cases, you may make a payment larger than was required at closing. If you do this, you qualify for an escrow refund within a short period after closing.

You Refinance Your Mortgage

Your escrow account can be closed because you either finished repaying your mortgage or refinanced it with a different lender. In the latter case, federal laws require your previous lender to issue an escrow refund check within 20 days.

If you refinance your mortgage with the same lender, your current escrow account is simply reassigned to the new loan.

As we’ve mentioned, some states require escrow accounts to have interest rates. This could also lead to a surplus in the account.

There are no limits to the maximum amount of money you can receive during an escrow refund. It makes sense as the money is yours, after all. The only limitation is the minimum amount, which is $50.

How long does it take for this type of refund to happen? Once you’ve identified an overage, notified your mortgage lender, and analysis has taken place, RESPA requires the company to refund you within 30 days.

Related: How to Get the Best Mortgage Rate for Investment Property in 2023

What Are Escrow Refund Checks?

When you receive an escrow refund, you get a check containing the amount of money that was in excess in the escrow account. 

Once you identify an overage, you request a refund from your mortgage lender. After the required annual escrow account analysis, the mortgage provider will likely issue a refund check. 

As for the timing, you can get a refund any month of the year. During the analysis, the loan servicers check whether the escrow payments match the monthly bills paid out of the escrow account.

For example, let’s assume that tax bills changed in July. During the rest of the year, you continued making the mortgage payments in full amount. You’ll likely have a surplus amount in your escrow account once they conduct the analysis in December. At this point, the mortgage lender will issue an escrow overage check.

Keep in mind that it’s not always obvious that the lender will issue the refund check. You may have to make a formal request.

Also, receiving refund checks isn’t a regular occurrence. The checks aren’t for large sums of money either. If you receive escrow refunds regularly or for large sums of money, your mortgage lender may have to adjust your payments downwards to avoid escrow overages.

If you’re entitled to a refund check, the timing is usually a few weeks after your mortgage provider conducts an annual adjustment on your escrow account. It could happen during any month of the year, but it’s the same period every year. Your mortgage provider could tell you when it happens.

What Is a Refinance Escrow Refund?

Refinancing a mortgage means getting a new loan once you’ve cleared an existing mortgage. Many homeowners refinance their mortgage to gain lower interest rates, shorten their mortgage term, or tap into their home equity to get funds for a financial emergency or pay debts. 

So, do you get escrow back when refinancing? You’re eligible for an escrow refund once you refinance your mortgage but with conditions. 

If you’re refinancing your mortgage with your original mortgage lender, your escrow account will remain intact. The existing funds already in your account will remain in the escrow account. As such, don’t expect this type of refund unless the property taxes or property insurance has changed.

However, things are different if you refinance your mortgage with a different lender. Once you’ve completed the mortgage refinance with the new lender, they’ll open a new escrow account for you. 

It means your original escrow account set up by your mortgage servicer will be closed. You’ll receive a refund check with the balance in your original escrow account.

What Is an Escrow Balance Refund?

An escrow balance refund refers to the check you receive for the entire balance in your escrow account. It is essentially an escrow refund. However, instead of receiving a check with a portion of the balance in your account, you get the entire amount. 

An escrow balance refund happens once you’ve fully paid off your mortgage and there’s some balance in your escrow account. 

How Do You Calculate Escrow Refund Amount?

Calculating your escrow refund amount isn’t that complicated. Firstly, you need to establish how much money you pay to your escrow account monthly. Remember, your payment is usually a combination of your property taxes and homeowner’s insurance expenses. Add these numbers up, and you have your monthly escrow payments.

After this, think of the cushion amount that your lender is allowed to keep by RESPA. Again, this amount should be worth two months’ payment. To calculate this amount, simply take your monthly escrow payment amount and multiply it by three. It should be enough to cover the next payment and remain with a two months balance. The amount you get is the total your lender can keep in the escrow account.

Now that you have this number look at how much money you have in your escrow account. If the difference is more than $50, you may be eligible for an escrow refund. Remember that there’s no limitation to the maximum amount you can receive as a refund. It only needs to be more than $50.

If you would love access to automated tools that let you know how various changes will affect your mortgage, use Mashvisor Mortgage Calculator. This tool factors in your input to give accurate calculations. Ensure you’ve done due diligence before so that you can enter precise property taxes, insurance, and other fees in the expenses section.

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How Do You Ask For an Escrow Refund?

Once you’ve calculated your escrow refund, it’s time to request a refund check from your mortgage lender. The mortgage servicing company will not conduct a new escrow account analysis based on verbal communication. 

How do you go about this? You will have to provide documentation as proof of your claims. Examples of documentation you can provide include:

• Letters from your tax assessor showing changes in tax liability
• Documents showing new insurance policies
• Recent tax bills

When submitting a claim to your mortgage lender for a refund, we recommend you prepare a detailed request letter, even if your mortgage provider may not require you to do so. The company representative you submit your request to isn’t the one performing the escrow account analysis. 

You can use the request letter to ensure you explain your situation better since crucial details can be lost in the communication process by a third party. A detailed letter will prevent the need for follow-up, which can further delay the refund process.

How Long Does an Escrow Refund Take?

You might be wondering when you will get your refund after refinancing. If you’re not in a hurry to get your refund, you can wait a few months to get the check. It could take a few months since mortgage lenders conduct the escrow account analysis annually. However, notifying your lender and asking for a new analysis in your letter could speed up the process.

In the request letter, ask the lender to provide you with a due date so that you can know when to expect the check. Always follow up with them if they’ve provided updates past the due date. 

To help with the follow-up process, request the name and contact details of the representative you’re talking to. It can help both you and the lender should the escrow account analysis take longer than expected.

All in all, be prepared to wait. It can take several weeks, sometimes months, to obtain an escrow account analysis and receive the escrow surplus check.

What Should You Do With Your Escrow Refund Check?

Every real estate investor would appreciate the godsend money that comes with an escrow surplus check. But before you put this money into your savings or checking account, you need to determine the best way to use it.

Here are some tips on how to use the funds in your escrow overage refund check:

Return to Sender

While the tax bills may be lowered, they might be temporary. Sometimes, you might be worried that the tax bills or insurance premiums will increase.

Different scenarios can bring about more tax bills and insurance premiums. Perhaps you might have added a new second-floor addition that will increase your insurance. Or the property values in your neighborhood might have increased to warrant an increase in tax bills.

In such cases, you can send the check back to your mortgage servicer and clarify that you want the money deposited into your escrow account.

Many mortgage lenders will offer you different options on your monthly bills. You can specify whether any extra money you send is sent to your mortgage principal or escrow account. You can choose the latter to avoid a shortage should your tax bills or insurance premiums increase.

If your mortgage lender doesn’t provide this option, you can call them and ask them whether it’s possible to contribute extra escrow funds with your next mortgage payment.

Pay Your Credit Card and Other Debts

If you have debts from your credit card and other sources weighing you down, it makes financial sense to use your refund check to pay off some of them. Keep in mind that credit cards often have high-interest rates, so paying them off fast is wise.

Besides, you can also make extra payments on your mortgage or car loan to make sure you finish paying them off in a shorter period.

Invest Your Escrow Surplus

Sometimes, it’s better to keep your finances where you see them grow. You can invest your escrow check in bonds, stocks, or anywhere else you’re comfortable with.

While you can have losses if you choose to invest, there’s a potential to make higher returns than with conventional savings accounts.

Boost Your Retirement Fund

If you’re getting closer to retirement, you can use your escrow surplus funds to boost the money in your retirement savings. You can put the finances in a traditional or Roth IRA if you’re yet to hit your annual contribution limit.

Key Takeaways

An escrow account is instrumental in taking some weight off your shoulders when paying property bills, such as taxes and insurance. It’s convenient for both parties involved as it ensures the bills are paid on time.

An escrow refund takes place when there’s a surplus of the required money in the account. If you find that there’s an overage, you can always write to your mortgage lender and request an account analysis. Once complete, you’ll receive an escrow disbursement check within 20 days.

Remember, you need to use smart tools to estimate your mortgage payments and see whether you might be eligible for escrow refunds. Mashvisor has the perfect tools for this and many other tasks in your investment journey.

Book your demo today and see what our tools can do for you.