An escrow refund occurs when a mortgage borrower has excessive funds in their escrow account. This overage can be due to a number of reasons, such as a lower property tax bill, lower homeowners insurance fee, a mortgage refinance, or a payoff. Lenders have the option to issue escrow refund checks or withhold the refund if the excess balance in escrow is less than $50.
Anyone who has dealt with utility bills and groceries knows that, in most cases, prices tend to go up. And while these costs and fees tend to rise over time, you could still find yourself in the enviable situation of having fees associated with your property decline. If that happens and you wind up with more money than you need in your escrow account, you will be due a refund. There are several reasons why you could receive a check in the mail for an escrow refund, which we detail below.
How does escrow work?
When you buy a home, you will be required to set up a new escrow account to make escrow payments. An escrow account has a third-party escrow agent overseeing the account who acts in the best interests of all parties. In the world of mortgages, it’s commonly used to distribute money during the process of buying and selling as well as the yearly upkeep of the property.
In regards to the yearly upkeep, money goes in and out of the account to pay the following fees:
- Property tax
- HOA fees
- Homeowner’s insurance
- Mortgage principal, interest, and fees
Remember, the lender insists that these fees be paid by them, as they need to make sure that there are no further liens or issues with the property should they need to foreclose. Therefore, they set up an escrow account so the funds can be directed to whom they are owed. For example, a borrower’s money coming out of escrow to pay property tax will go to a different destination than the borrower’s money coming out of escrow to pay homeowners insurance.
An escrow refund occurs when there has been a change that means the borrower now has excess funds in their escrow balance. The borrower should receive a check in the mail or notice from their lender or escrow account manager stating they are due a refund. In most cases, these refunds are for the following reasons:
Property tax is the bane of many property owners’ existence, but it can go down as easily as it can go up. In this case, you might be due for a refund. For instance, if the property tax rate in your neighborhood stood at 1%, but now is only .7%, you could be due a refund.
Homeowners insurance changed
You aren’t tied to the insurance that you bought with your home for all eternity. You could find some new competition coming in with a significantly lower quote. If you switch to the lower-cost policy, you could be due a refund. Be careful to ensure the new insurance is legitimate — the lender or mortgage servicer will want to see that it offers protection similar to the first plan.
If you feel like you are overpaying for homeowners insurance, explore your options for a better policy.
HOA fees lowered
Perhaps your homeowners’ association board realized they were overpaying for landscaping, or perhaps there was a high-level arrest for embezzlement of HOA fees by a member of the board. Regardless of the reason, if you find yourself with lower HOA fees, this could result in excess funds being held in escrow with a refund due to you.
If you pay off your mortgage 100% and still have money in your escrow account, you can demand a refund for the excess cash. Mortgage servicers will often refund you automatically 20 days after the mortgage has been paid off. But in lieu of this, contact your loan servicer or even an attorney.
You paid too much
If you overpaid on the purchase of the property or via any of the payments that you made to cover costs, you are also entitled to a refund. People might overpay to cover any potential surprise fees and be due a refund on any excess funds above those that are required.
Shaun Martin, of The Home Buying Company in Denver, Colorado, has seen people overpay on their mortgages and the money returned to them via escrow. “Escrow refunds are common when borrowers pay more than their scheduled mortgage payment,” he says. “These overpayments may be returned to the borrower in a lump sum or over time, depending on the terms of the loan agreement and the lender’s policies.”
Your mortgage terms changed
This most commonly occurs in a refinance. There are two main reasons for a refinance escrow refund. First, you pull the equity out of your house, which will be converted to cash, and end up in an escrow account. And second, most people are going to refinance only if they get better terms than their original loan. If this is the case, and they obtain a loan with a lower interest rate, then the monthly mortgage payment will be lower. Therefore, the original fees in the escrow account will be greater than the new outgoings, and the borrower is entitled to a refund.
How to receive an escrow refund check
Your lender or mortgage servicer will probably be on top of it if you end up owing much less in fees or payments than what is being held in escrow. Lenders will do their due diligence on an annual basis to come up with this calculation. Once this is done, you will receive an escrow refund check or a notice from the mortgage servicer that excess funds need to be sent somewhere.
You might get an unexpected escrow refund!
Sometimes, people will get a check in the mail for an escrow refund that they don’t even know about. Alex Shekhtman, the founder of LBC Mortgage, has had this experience before. “Usually, this happens because the fees associated with their transaction are overestimated, and the actual costs are lower than originally projected,” he says. “When this occurs, the client receives a refund from escrow which is typically a pleasant surprise for them. It may not be a large amount of money, but it is still appreciated nonetheless.”
Why did I receive an escrow refund check?
You received your escrow refund check because you had excess money in your escrow account. This could happen for many reasons, such as a change in insurance costs, HOA fees, mortgage payments, or property taxes. It can also be due to you overpaying for an expense, or because you closed a transaction.
Do you get an escrow refund every year?
No, you only get an escrow refund if there are excess funds in your escrow account. You could actually have an increase in your bills that requires you to put more money in your escrow account with increased monthly payments.
What should I do with the escrow refund check?
If possible, invest the money. SuperMoney has a great guide that directs you on how to invest it responsibly. You could also save the money in case of potential future home expenses.
What happens to extra escrow money?
Extra escrow money goes back to the borrower. However, if the amount does not exceed $50, the lender has the option to refund the money or not. They can choose to keep it in escrow to make upcoming payments based on their annual escrow account analysis.
- An escrow refund occurs when a mortgage borrower has excessive funds in their escrow account.
- An escrow refund is usually associated with lower required payments from escrow due to lower property tax or homeowners insurance bills, lower HOA fees, or a change in the mortgage.
- Usually, loan services will automatically issue refunds when they conduct their annual analysis. If you feel you are owed a refund but don’t receive it, contact your loan servicer.
- A lender is only required to refund money in escrow if the excess funds are greater than $50.
View Article Sources
- California Property Tax: An Overview – California State Board of Equalization
- Timely escrow payments and treatment of escrow account balances – Consumer Financial Protection Agency
- Escrow in a Mortgage: What Is It and Why Is It Important? – SuperMoney
- What Is Escrow to Mortgagor Disbursement? – SuperMoney
- Escrow Agent: What are the Duties of an Escrow Officer? – SuperMoney
- What Are Prepaid Costs When Buying a Home? – SuperMoney