Alyssa Lane
Escrow accounts are used to hold funds for payment of homeowner’s insurance and property tax. An escrow refund is a payment your mortgage servicer issues when there are excess funds in your escrow account following an annual account review. There are several reasons why you may be eligible for an escrow refund, including a decrease in property tax rates, a better homeowners insurance rate, or overpayment when purchased. When you receive an escrow refund, you may choose to keep the money and do as you please, or you may deposit it back into your escrow account to avoid a shortage.
| Characteristics | Values |
|---|---|
| What is an escrow account? | A secure place to hold funds intended to cover insurance and taxes. |
| Who uses escrow accounts? | Homeowners who took out a mortgage to finance their home. |
| What is an escrow refund? | A payment your mortgage servicer issues when there are excess funds in your escrow account following an annual account review. |
| When do you get an escrow refund? | When there is a surplus of $50 or more in your account, or when your insurance provider lowers your rates. |
| What to do with an insurance refund? | Send the refund check back to your escrow account to ensure sufficient funds, or keep the money and do as you please. |
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What You'll Learn
Understand what an escrow account is
An escrow account is a financial tool used to protect both the buyer and the seller during a real estate transaction. It is a secure account held by a third party, such as a bank or mortgage company, that holds funds until the transaction is complete and all conditions are met. At this point, the funds are released to the right party.
There are two types of escrow accounts: one is used during the home-buying process, and the other is used throughout the life of the loan. During the home-buying process, an escrow account can be used to hold a buyer's earnest money deposit, demonstrating their seriousness about purchasing the property. If the contract falls through due to the buyer's fault, the seller usually keeps this deposit. The second type of escrow account is used to hold funds intended to cover insurance and taxes. This type of escrow account is often used by homeowners who have taken out a mortgage to finance their home. It is a convenient way to manage property taxes and insurance premiums, as well as other expenses like flood insurance and private mortgage insurance. Each month, a portion of the homeowner's mortgage payment is deposited into this account, and the lender pays the bills on their behalf when they are due.
Escrow accounts are subject to annual reviews, also known as escrow analyses, to ensure that there are sufficient funds to cover property tax and insurance payments. If there is a surplus of funds in the account, the lender issues an escrow refund to the homeowner. Similarly, if there is a dramatic decrease in property taxes or insurance associated with the property, the escrow account may be closed, and the remaining balance is refunded to the homeowner.
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When to expect an insurance refund
An escrow account is a secure place to hold funds intended to cover insurance and taxes. Escrow refunds can occur in a variety of situations. Here are some instances in which you might be eligible for an insurance refund:
- Paid-off mortgage: If you have a remaining balance in your escrow account after you pay off your mortgage, you will be eligible for an escrow refund of the remaining balance. The remaining balance of your escrow account should be returned within 20 days of paying off your mortgage in full.
- Change in insurance company or policy: If you switch insurance companies or policies, you may be eligible for an insurance refund. This could be because you found a better rate with a different insurer or because you moved out of state, and your insurer issued a new policy with a lower rate.
- Overpayment: If you made a larger-than-necessary upfront payment at closing, you may receive an escrow refund for the excess funds in your account.
- Annual escrow analysis: Lenders are required to review your escrow account every 12 months and issue a refund if there is a surplus of $50 or more in your account. This surplus may occur if you have paid more into the account than the lender needs to cover your insurance and property taxes. The lender must refund this amount within 30 days of the analysis.
The timing of an insurance refund can vary depending on the company and the specific circumstances. When you cancel an insurance policy, you will typically receive a refund for the unused portion of your premium, calculated on a pro-rata basis. However, some companies may take up to 7-10 business days for processing and mailing, while others may take longer. It is always a good idea to consult with an independent agent or a licensed insurance agent to understand policy cancellations and refunds.
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How to deposit a refund into an escrow account
An escrow account is a secure place to hold funds intended to cover insurance and taxes. Escrow refunds can occur in a variety of situations. For example, if you have a remaining balance in your escrow account after you pay off your mortgage, you will get a refund of the remaining balance. You may also get a refund if you switch to a homeowners insurance policy with a better rate.
If you receive a refund check from your previous insurance company, you will need to send those funds back to your escrow account to re-balance your escrow account and rectify the shortage. You can do this by making an escrow-only payment in the amount of the refund. This will ensure that your escrow account has sufficient funds.
If you have enough cash for your payments without using the insurance refund, then you should deposit the refund back into your escrow account. This will prevent a shortage in your escrow account, which could lead to an increase in your monthly mortgage payment.
It is important to note that escrow refunds are relatively rare, so if you receive one, consider using it to bolster your emergency fund, pay down credit card debt, or make an extra payment on your car loan or mortgage.
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What to do if your escrow account doesn't have enough funds
An escrow shortage occurs when the funds in the escrow account fall below the minimum requirement, leaving insufficient money to cover property taxes and insurance bills. This can happen due to an increase in property taxes or homeowner's insurance premiums, a reassessment of taxes, a change in insurance providers, or a change in the due date of property taxes or insurance premiums.
If your escrow account doesn't have enough funds, here are some options to consider:
- Pay the full shortage amount upfront: Paying the shortage in full will bring your escrow account back into balance. While this option may provide peace of mind, it can be a significant financial burden, especially if the shortage is substantial. Before choosing this option, ensure that you have sufficient funds to cover the shortage without dipping into your emergency savings.
- Spread the shortage amount across future payments: You can choose to pay nothing immediately and divide the shortage amount evenly across your payments for the next year. This option can help reduce the financial burden by distributing the shortage across multiple payments. However, your monthly payments will still be higher than what you were previously paying.
- Combine full and partial payment: Start by making a large payment to reduce the financial burden, and then spread the remaining balance over the following months until the shortage is paid in full.
- Refinance your home loan: Depending on your circumstances, refinancing your home loan or other loans may provide budget relief. Review your loan options and consider refinancing to ease the impact of the escrow shortage.
- Review your insurance coverage: Shop around for the best homeowner's insurance policy that suits your needs. Understand the terms if you switch policies, and ensure you are maximising any possible insurance discounts.
- Create a dedicated savings account: Set up a savings account specifically for unexpected escrow increases. This can serve as a backup plan to supplement your escrow shortage.
- Make special payments toward your escrow account: Discuss with your lender the possibility of making additional payments directly toward your escrow account to cover the shortage.
- Seek professional advice: Consult a title and escrow professional, especially if there is a large shortage. They can guide you through the intricacies of managing your escrow account and provide valuable insights.
Remember, staying informed about your escrow account is crucial. Keep track of your escrow statements and be mindful of any changes in your escrow funds. Additionally, consider signing up for alerts or notifications related to your escrow account to help you make informed decisions and minimise the impact of escrow shortages.
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What to do with a refund if you switch insurance providers
When you switch insurance providers, you may be eligible for a refund if you paid your premium in advance. The exact method of distributing refunds may vary based on your insurer. If you paid your premium with a check, you'll usually get an insurance refund check. Similarly, if you paid with a credit card, your refund will appear as a credit on your card balance. Depending on your insurer, you may have to pay a cancellation fee that could offset your refund amount.
If you have a mortgage, you likely make monthly mortgage payments that include funds for your loan principal, interest, property taxes, and insurance. A portion of your mortgage payment is set aside and held in an escrow account to cover taxes and insurance payments. Escrow refunds can occur in a variety of situations, such as when you pay off your mortgage completely or switch to a different lender. If you are refinancing your mortgage with a different lender, your original escrow account will be closed, and you should receive a check for the remaining balance.
When switching homeowners insurance policies, it is important to contact your servicer and inform them about your new policy. Homeowners insurance policies are paid in advance, so if you don't send your refund check from the previous carrier back to your servicer, you may end up with an escrow shortage. To avoid this, you should make an escrow-only payment in the amount of the refund.
If you have received a refund after switching insurance providers, you may want to consider depositing the refund back into your escrow account to ensure that you have sufficient funds to cover your insurance and tax payments. This can help prevent a potential increase in your escrow payment when the escrow analysis is done. However, if you have enough cash to cover your payments without using the insurance refund, you can choose to keep the refund and use it for other purposes.
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Frequently asked questions
An escrow refund is a payment your mortgage servicer issues when there are excess funds in your escrow account following an annual account review.
Escrow refunds can occur in a variety of situations. For example, if your homeowners insurance premium or property tax rate decreases, you may receive an escrow refund. You may also receive a refund if you pay off your mortgage completely and have a remaining balance in your escrow account.
If you receive an insurance refund, the money is yours to keep and use as you desire. However, if you do not deposit it back into your escrow account, you may have low funds in the escrow account. This could cause your mortgage servicer to increase your escrow payment.
First, shop for and choose a new policy and set a start date. Second, call your mortgage company to notify them of the change. Third, cancel your old policy. Fourth, send some or all of your refund check from your old home insurance policy back to your escrow account to ensure sufficient funds.
You can switch home insurance companies even if your escrow doesn't have the required funds. You may have to pay the home insurance premium out-of-pocket for the first year, fund your escrow by sending a one-time payment to cover the cost, or send the full refund check to the escrow account immediately after it is received.
