I can only assume that if you’re asking this question, you’re nearing the finish line of the financial marathon that is a mortgage repayment term — well done!
It’s always daunting taking out a mortgage, but you’ve worked hard over the years, met the terms of the agreement, and now you’re almost free to move on with your life.
However, before you break out the Champagne and celebrate your newfound financial freedom, there’s the matter of your escrow account to address.
What Is A Mortgage Escrow Account?
The term “escrow account” may seem like complex financial jargon, but luckily for us, it’s actually a very simple concept.
When you take out a mortgage, the lender creates a savings account for you that they then manage on your behalf.
Your lender will store a small portion of each mortgage repayment you make in this savings account in order to pay off your insurance premiums and property tax over the course of the repayment term. That’s literally all an escrow account is — simple, right?
But what happens to this handy little savings account when you pay that final monthly fee and complete your obligations as a borrower? Let’s find out!
The Life of Your Escrow Accounts After Your Final Mortgage Payment
There are actually a few options to consider when it comes to dealing with your defunct escrow account, but before you make your final mortgage payment and decide how to move forward, it’s best to request an escrow statement from the lender.
You’re entitled to this document, so your lender won’t mind — it’s all part of business as usual for them.
An escrow statement is just like your bank statement, but for your escrow account. It shows all the money the lender paid in, and all the money that was taken out in order to cover taxes and mortgage insurance.
Your first port of call is to compare this statement with your own tax records in order to ascertain if the information is accurate. If something doesn’t seem quite right, it needs to be brought to the lender’s attention before you move on.
Receiving Escrow Refunds
If you want to keep things as simple and painless as possible, after the information on the escrow document has been verified, you can request a refund of excess funds in the escrow account.
Usual lender protocol is to mail you out a check, so you can pay the funds into your current account at your own leisure. The lender will use whatever address they have on file, so it’s essential that you notify them of any changes in residence.
Banks tend to take their time when it comes to escrow refunds, as there are a lot of loose ends to chase. Basically, they want to officially verify that the correct amount has been paid over the course of your mortgage. These checks can take up to 30 days, so you’ll have to be patient while the bank figures things out.
Alternatively, if your lender handles your general banking as well, it can normally be arranged for the residual escrow funds to be paid directly into your checking or savings account — perfect!
Using Escrow Excess as Payoff
Okay, so here’s why I suggest that you request your escrow statement before paying your last mortgage installment. If the lender is willing, they may let you allocate whatever is left in your escrow account to help cover the final installment.
Side note — If you decide to refinance your mortgage with the same lender, the escrow account from the first loan agreement remains intact for the following term.
Using Escrow Excess for Refinancing
Perhaps you haven’t quite paid off your mortgage, but you’ve discovered a lender that can offer you better rates, and now you want to refinance your remaining debt. You can use the residual escrow money as payoff for your new agreement.
That said, you can’t directly transfer the same escrow account from one lender to another, different lender. This means you’ll have to fund the opening of a new account yourself; however, it’s a temporary pain, as your expense will be offset by the eventual injection of your old escrow surplus into the new agreement.
What If There’s a Shortage Rather Than Surplus In My Escrow Account After the Repayment Term?
We all love a refund, but unfortunately, it’s not a dead cert that you’ll have excess funds in your escrow account. You may also have a shortage of funds, meaning you still owe money to the taxman and your insurance policyholders.
Even if you do have a negative escrow balance at the end of the repayment term, it’s standard practice for the lender to send the account funds your way, so prepare to make the final payments yourself.
If you’re refinancing your mortgage with a new lender, you can normally opt to add the amount you still owe for taxes and insurance premiums on top of your borrowed sum, so you don’t end up out of pocket in the present.
That’s really all there is to it, folks. When you pay off your mortgage, your escrow account will be closed, and you will receive a refund of the surplus credit. Alternatively, if you act quickly, you may be able to put the surplus towards the final mortgage payment itself.
If you’re seeking further financial assistance from your current lender, the same account will stand for the second term.
If you’ve refinanced with a different lender, you can use it to pay off the formation of your new escrow account, as you cannot transfer an established escrow account to another lender.
You may also end up with a negative escrow balance, which means you’ll have to pay any remaining tax/insurance debt yourself, as once your final mortgage installment has been made, the lender is no longer obliged to keep up with repayments.
As you’re approaching this final mortgage fee, I strongly advise that you request your escrow statement, as it will prepare you for whatever’s to come. Best of luck, and here’s hoping for a surplus!