There are so many decisions that you have to make when you are buying a house, and even when you own a house. One of the most common decisions that people make during the time that they are paying off their mortgage is to refinance.
Refinancing has a lot of benefits, you can do this to extend/shorten your mortgage. Likewise, you can do this to release equity in your house for home improvements, and you can simply do it to get a better interest rate on your mortgage. But, when you refinance, you might not consider the impact that this could have on your escrow money.
Escrow money is something that people often forget about, but in this guide, we’ll be taking a look at what happens to it when you refinance. So, with no further ado, let’s dive right in.
What Happens To My Escrow Account If I Refinance?
When you make the decision to refinance, then you might have completely forgotten about your escrow account, and the money that is kept in it.
Escrow accounts are fairly common, and a lot of lenders enforce them upon their mortgage customers. Especially customers that carry any sort of risk.
As you will have been paying money into your escrow account monthly, alongside your mortgage, it is possible that you might have forgotten about this account. But, before you make the decision to refinance, you might want to know what happens to your escrow account first.
The escrow account is part of your original mortgage. Unfortunately, this means that when you refinance (pay off your old mortgage with a new mortgage), you will lose the balance of your escrow account.
This doesn’t happen with all mortgages, but the majority of lenders will keep a hold of that money, as this was agreed in your mortgage contract.
In most cases, this also applies to refinancing when you are sticking with the same lender, and simply having a different mortgage. This can be very disappointing, but unfortunately this is just a part of the mortgage agreement that you made.
Do I Get My Escrow Money Back When I Refinance?
Based on everything we have just said, you might expect to lose all the money in your escrow account when you refinance. But this isn’t actually the case. While your escrow account will not be transferred to your new mortgage, and your balance will be lost, you will not lose all the money in that account.
While you are in the process of applying for a new mortgage, you will still have to keep up your existing mortgage payments, and with them your escrow payments. The money paid during this time will not be lost.
When you are making escrow payments, you are essentially being charged extra on your mortgage. This extra money is added to your escrow account, and it is used for your lender to directly pay some of your bills. These bills will include property taxes and insurance payments for your home.
While you are in the process of transferring your mortgage, you will still be paying the escrow money to your lender, but your lender will not necessarily be spending it on your property taxes/insurance. This is because these payments have become the responsibility of your new lender.
So, your escrow account will not transfer to your new mortgage, but you will get money back. Any money that has been paid into your escrow account since your last insurance/property tax payment (prior to refinancing) will be returned to you, as this money is rightfully yours. This is known as an escrow refund.
How Long Does It Take To Get An Escrow Refund After Refinancing?
When you refinance your home, you take out a new mortgage to cover the costs of your old mortgage. So, once you have refinanced, your new lender will pay money to your old lender. You will then repay the costs of this monthly to your new lender.
Due to this, you will not receive your escrow refund until your new lender has taken over the mortgage.
Some people expect their refund to happen instantly, but this isn’t the case. There is a lot of paperwork that comes with mortgages, and a lot of boxes that have to be ticked. All of this will have to be complete before your refund will even be processed.
Due to this, it can take up to 30 days (from the first payment after refinancing) for your refund to be processed.
If you have refinanced to a new mortgage lender, then you may incur a charge for this money being refunded. This is simply to cover the paperwork that goes with it. But, if you are sticking with the same lender, and simply getting a new mortgage, you usually will not need to pay a fee to receive your escrow refund.
What Do You Do With An Escrow Refund Check?
After the first payment from your new lender has been made, you will receive your escrow refund. This usually comes in the form of a check, and will be sent to your address. When you receive this money, you might be unsure what to do with it. So, here are some suggestions for the best things to do with your escrow refund check.
- Send it to your new lender, and add it to your new escrow balance.
- Use it to pay off any outstanding credit that you have with lenders, and improve your credit score at the same time.
- Top up your Roth IRA, and possibly max out your account for that year.
- Invest in stocks and shares.
- Deposit it into your current account, and spend it on a treat for you and your family.
In short, you will not get your escrow account back when you refinance. But, any surplus money that has accumulated in that account during the refinancing period will be sent back to you. This will come in the form of a check, and you should expect it within 30 days of your new lender paying your first monthly payment to your old lender.