If you’re considering refinancing your home, you might have heard the term “netting your escrow account.” It’s an important concept that can save you time and money. But what does it mean, and why should you care? Let’s break it down and explore the benefits of netting your escrow account with your current lender during a refinance.
Refinancing your mortgage can help you save money by lowering your interest rate or monthly payments. However, one aspect of refinancing that is often overlooked is what happens to your escrow account. Your escrow account holds funds to pay for property taxes and homeowner’s insurance on your behalf. So what happens when you refinance?
What is an Escrow Account?
An escrow account is a special account that your mortgage lender sets up to pay your property taxes and homeowner’s insurance premiums.
Here’s how it works:
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Your monthly mortgage payment includes an escrow portion in addition to the principal and interest.
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The escrow portion is typically 1/12 of your annual property taxes and home insurance premiums
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The lender collects the escrow funds each month and holds them in the escrow account.
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When your property tax and insurance bills come due, the lender pays them from the escrow account on your behalf.
Escrow accounts make homeownership easier by spreading out these large periodic payments into affordable monthly amounts. It also ensures taxes and insurance are paid on time, avoiding penalties or lapses in coverage.
What Happens to Escrow When You Refinance?
When you refinance your mortgage your old escrow account gets closed and a new one is opened.
Unfortunately, existing escrow funds cannot simply be transferred to the new mortgage account. Here’s what happens:
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Any funds remaining in your old escrow account will be refunded to you within 30-45 days via check or wire transfer.
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You’ll need to start funding a new escrow account with your new lender from scratch.
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The new lender will estimate your property taxes and home insurance for the year ahead and require sufficient escrow funds upfront at closing to cover these payments.
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You won’t have access to the refunded escrow funds from your old lender right away to help fund the new account.
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This means you may need to bring extra cash to closing to start the new escrow account, depending on timing.
So while inconvenient, starting a new escrow account is usually necessary when refinancing with a different lender. The key is being aware this will likely increase your closing costs.
Opting Out of Escrow When Refinancing
Some borrowers consider opting out of having an escrow account when they refinance to avoid funding a new account upfront.
Here are some things to keep in mind:
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Most lenders require an escrow account for conventional loans with less than 20% equity. FHA, VA, and USDA loans always require escrow accounts.
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Opting out may incur lender fees around 0.25% of the loan amount. You’d also lose potential interest rate discounts for having an escrow account.
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Without escrow, you take on responsibility for directly paying property taxes and insurance premiums yourself on time. Late payments could lead to fines or lapses in coverage.
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If you have a history of missed payments, the lender may force you to establish an escrow account anyway to lower their risk.
So weigh the pros and cons carefully when deciding whether to opt out of escrow when refinancing. For most borrowers, the convenience and safety of keeping escrow intact makes sense despite needing to start a new account.
Timing Considerations for Escrow When Refinancing
The timing of your refinance can impact the escrow requirements at closing. Here are some key timing factors:
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Refi closing later in year: More property taxes may be due at closing if refinancing later in the year after some payments are already made from the old escrow account.
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Refi around tax due dates: Closing right before property tax due dates often requires large escrow deposits. Wait until after taxes are paid to lower cash needed.
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Refi before insurance renews: Paying premium on existing policy upfront vs. new policy may require less cash.
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Refi after old escrow funds received: Having escrow check from old lender makes funding new account easier.
Discussing timing considerations with your lender early in the refinance process can set proper expectations for escrow requirements at closing.
Key Takeaways on Escrow When Refinancing
Refinancing can provide many benefits, but also impacts your escrow account in the following key ways:
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Your old escrow account will be closed and remaining funds refunded to you after closing.
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A new escrow account will need to be established with the new lender, requiring upfront funds.
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Timing of closing relative to tax and insurance due dates can affect amount required.
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Opting out of escrow may increase lender fees or interest rates.
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Keeping an escrow account intact provides convenience and payment protection.
So be sure to discuss escrow requirements with your lender early on when refinancing to ensure no surprises at closing! With proper planning, you can smoothly transition to a new escrow account and enjoy your refinance savings.
What Is Netting an Escrow Account?
When you have a mortgage, your lender often manages an escrow account for you. This account is used to pay things like property taxes and homeowners insurance. Each month, part of your mortgage payment goes into this account, and when taxes or insurance are due, the lender pays them on your behalf.
When you refinance, you might have the option to net your existing escrow account. In simple terms, this means your lender will apply the remaining balance in your escrow account toward your loan payoff rather than refunding the balance to you after closing. Here is how choosing to net your escrow compares to choosing not to net escrow and receive a refund after closing:
- Refund After Closing:
- Your existing escrow account is closed.
- The lender sends you a refund of the remaining escrow balance after the refinance is complete. It might take a few weeks to receive your check in the mail.
- You need to fund a new escrow account for the new loan, which may require additional cash at closing. You will have to bring cash at closing to pay your closing costs and to fund your new escrow account while you wait for your escrow refund check to arrive from your old escrow account.
- Escrow Netting:
- Your existing escrow balance is applied directly to reduce the payoff amount of your old loan.
- Keeping your new loan amount about the same, this can lower the amount you need to bring to closing because the netted escrow funds can be applied to funding your new escrow account or to pay for other closing costs. Or. You could still bring cash to close, and have a lower loan amount, slightly reducing your monthly payment and lowering the total interest you will pay over the life of the loan.
- In either case, no need to wait for a check in the mail with your escrow refund from the loan you refinanced since the funds have been already applied to your new loan transaction.
In Short: The Benefits of Netting Your Escrow Account
1. Reduce the Cash Needed at Closing or Lower Your New Loan Amount Refinancing your home can come with closing costs. These can include things like appraisal fees, title insurance, and other costs associated with processing the new loan. When you choose to net your escrow account, the balance in that account is applied directly to your loan payoff reducing the total amount you owe or to reduce the cash you need to close by using the money to pay closing costs or fund your new escrow account. You can choose to lower your new loan amount or reduce the amount cash you need to bring to the closing table, making the process more affordable upfront.
2. Simplifies the Process Netting your escrow balance can make the entire refinancing process smoother and simpler. Instead of waiting for a refund from your current lender after the refinance is complete, you can have those funds immediately available to reduce your new loan balance or apply to closing costs or funding your new escrow. This eliminates the waiting period and the hassle of receiving and managing the refund yourself.
3. Helps You Maximize Your Available Funds When you’re refinancing, especially if you’re trying to lower your monthly payment or total interest paid, every dollar counts. By applying your escrow balance directly to your loan payoff, you maximize the funds available for the transaction. This could mean less financial juggling during the refinance process and more flexibility with your money.
4. Avoids Delays in Reapplying Funds When you receive a refund of your escrow account balance after closing, there’s typically a delay of several weeks before you get that money back. Netting the escrow account cuts out this delay. Instead of waiting, those funds can be put to work right away. This can be especially helpful if you’re trying to refinance quickly or if timing is important in your financial planning.
What happens to your escrow balance when you refinance?
FAQ
Do I get my escrow back when I refinance?
Once mortgage payoff funds are posted, money held in escrow with your current lender will be returned to you from that lender.
How do I lower my escrow payment?
Who owns the money in an escrow account?
Who owns the money in an escrow account? The buyer in a transaction owns the money held in escrow. This is because the escrow agent only has the money in trust.
Why did my escrow go up $200?