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An escrow refund is a payment your mortgage servicer may return to you when there is an overage in your escrow account. These bank accounts are set up by your mortgage servicer to hold funds for paying property taxes, homeowners insurance and other expenses on your behalf, and there are several reasons why they may have a surplus.
If you've received an escrow refund check, the money is yours to keep and use as you desire. Let's go over why you may have received this refund and what you can do with it.
Why Do Escrow Refund Checks Get Issued?
Your mortgage servicer uses an escrow account to hold funds for paying home closing costs, such as home inspections and loan fees, and to hold funds used to pay your property taxes and homeowners insurance once you begin making payments. The servicer typically collects a portion of the cost of these annual taxes and insurance premiums with each monthly mortgage payment and keeps the funds in the escrow account until the yearly bills come due.
At the end of each year, the servicer reviews your escrow account to make sure there is enough money to cover the next year's expenses. If the balance in the account exceeds what's needed for anticipated expenses, the lender may refund the difference to you.
For example, let's say your monthly mortgage payment of $2,000 includes $400 for property taxes and $200 for homeowners insurance. Over the course of the year, the mortgage servicer collects $4,800 for property taxes and $2,400 for homeowners insurance, for a total of $7,200. If actual expenses for the year end up being $6,900, there will be a $300 overage in the escrow account, which the servicer will refund to you.
You may also receive an escrow refund when:
- You deposit more in your escrow account with your earnest money or down payment than is ultimately needed to cover closing costs. In that event, you could receive a refund within a short time after your closing date.
- Your escrow account is closed out, which happens after you make your final mortgage payment or when you refinance your mortgage with a new lender. (If you refinance with the same lender, your existing escrow account is typically reassigned to the new loan.) Upon closing an escrow account, federal regulations require your mortgage servicer to send you a check for the amount of its contents within 20 days.
Common Causes of Escrow Surplus
Reasons there might be excess funds in your escrow account at the end of the year include:
- Lower taxes than anticipated: The portion of your mortgage payment reserved for property taxes is an estimate based on past tax bills. If your community adjusts its tax rate or lowers your property assessment, that could cause an overage in your escrow account. (By contrast, if your tax rate increases, an escrow shortage could result, meaning you'd have to write a check for the difference when your tax bill comes due.)
- A better homeowners insurance rate: If your insurance provider lowers your rates, the amount collected in escrow to pay your annual premium could be excessive, resulting in a refund. Reasons your insurance rate may be reduced include:
- Bundling of auto policies with your homeowners policy
- Making improvements that safeguard your home against fire or natural disaster
- Improving your credit scores dramatically
If you receive a discount in your insurance rate, let your mortgage servicer know so they can adjust your monthly payment accordingly.
When May You Receive an Escrow Refund Check?
Escrow refund checks should not be regular occurrences, and they should not be for large sums. If either is the case, your mortgage servicer may need to adjust your monthly payments to prevent escrow overages.
The timing of your escrow refund, if you're entitled to one, is typically a few weeks after the annual adjustment your mortgage servicer conducts on your escrow account. That could be any month of the year, but it'll be the same time every year. Your mortgage servicer can tell you when that is.
What Can You Do With an Escrow Refund Check?
An escrow refund check can be a welcome windfall, so before you deposit it in your checking or savings account, consider the best way to make use of it. Some options to consider include:
- Bolster your household emergency fund.
- Pay down your credit cards.
- Make an extra payment on your car loan or mortgage.
The Bottom Line
An escrow refund returns excess funds your mortgage servicer inadvertently collected over the course of a year. It's a normal correction in the imperfect art of anticipating insurance and tax expenses. Escrow refunds are relatively rare, so if you get one, make the most of it.