Mortgage payments are just one of several costs you incur when you buy a home, including homeowners insurance and property taxes. Your mortgage lender has a vested interest in making sure these bills get paid on time, so it collects the payments from you in advance. The lender holds the funds in an escrow account until the bills come due.
If the lender overestimates the amount it needs to pay the bills for a given year and charges you too much, you might be entitled to an escrow refund.
What is an escrow refund?
When you close on your home, you’ll put money into an escrow account that your mortgage servicer will use to pay your home insurance and property taxes. Going forward, a portion of your mortgage payments will go to replenish the escrow account as the servicer draws on it for necessary payments.
Mortgage rules require servicers to analyze escrow accounts every 12 months.
An escrow refund is money your mortgage servicer returns to you when its annual escrow analysis shows a surplus in your account. A surplus occurs when you’ve paid more into the account than the lender needs to pay your homeowners insurance and property taxes, and to maintain a reserve.
Common reasons for escrow refunds
Mortgage regulations require your loan servicer to perform an “escrow account analysis” every 12 months. The analysis should determine how much you need in the account to pay taxes and insurance for the next 12 months, calculate your monthly mortgage payment for the coming 12 months, and determine whether you have too much, or too little, money in the account.
You’ll receive a refund from escrow in any of the following circumstances:
An analysis reveals a surplus of $50 or more. When a surplus totals $50 or more, mortgage escrow refund rules state that the lender must refund it to you within 30 days after the analysis. The lender may credit smaller surpluses to the following year’s escrow payments.
Your homeowners insurance premium or property tax rate decreases. A decrease in the amounts due from your escrow account could lead to a surplus of $50 or more.
You repay your mortgage loan in full. Your relationship with your lender ends once you’ve repaid your loan in full. At that point, you’ll be responsible for submitting your own homeowners insurance and property tax payments.
You cash-out refinance with a different lender. A cash-out refinance pays off your existing mortgage, so it entitles you to an escrow refund. But your new lender will open an escrow account, too, so it usually makes more sense to transfer the funds into the new account.
You sell your home. A home sale also results in an escrow refund because you’ll pay off your mortgage with the proceeds of the sale. The lender will then refund your escrow balance.
How escrow accounts work
After your mortgage lender approves your loan application, it opens an escrow account where it’ll hold the funds you need to pay your insurance premium and property taxes for the coming year. The lender may also require a reserve of up to two months’ worth of escrow expenses in case the insurance or tax bill increases unexpectedly.1
After you close on your home, the lender will calculate the total it needs in escrow to pay bills for the coming year and then divide the amount by 12. It adds that total to your regular mortgage payment and earmarks the funds for your escrow account.
A mortgage that works this way is called a PITI loan because it includes principal, interest, taxes, and insurance.2 One benefit of having a PITI loan is that you don’t have to worry about managing the insurance and property tax bills. The lender gets its own copies and pays them directly from the account, with no action needed on your part except to verify that the lender has paid the bills.
What is an escrow analysis?
Insurance companies raise and lower homeowners insurance premiums, and municipalities and counties change tax rates from time to time. The law requires mortgage lenders to analyze borrowers’ escrow accounts every 12 months — to ensure they’re not collecting too much or too little based on any changes going into effect for the coming year.
If an escrow analysis shows your account won’t have enough to cover upcoming bills, your mortgage servicer will notify you. You may need to make a lump-sum payment to cover the shortfall. Or your lender could spread the shortfall amount over multiple payments added to your monthly mortgage payment.
On the other hand, if the analysis shows you have a surplus, it could reduce your future payments or issue a mortgage escrow refund.
How do you get an escrow refund?
Once your lender’s escrow analysis identifies a surplus, it has up to 30 days to issue a refund. The precise process for that varies by lender.
For example, Wells Fargo, like many banks, sends you a refund check for the overage amount. U.S. Bank, on the other hand, lets you select how you want to receive it — as an electronic deposit into a checking account or via a paper check mailed to your home.
How long does it take to get an escrow refund?
When a surplus equals $50 or more, the lender must refund the amount within 30 days. In the case of a full loan repayment, the lender should issue an escrow balance refund within 20 days.