After making all your mortgage payments for several years, you suddenly get a check in the mail from your escrow account. If you didn’t pay close attention during your mortgage closing, you may not even remember what an escrow account is. Here’s why you may get those surprise bonus checks every so often:
What is an Escrow Account?
An escrow account is a savings account maintained by a third party, not your lender. Many lenders require borrowers to use an escrow account to pay for their mortgage expenses. You likely prepaid your first mortgage payment, part of your property taxes, and maybe some or all of your homeowners insurance at the time you signed your mortgage documents. If so, this was all placed in your escrow account.
How Does an Escrow Account Work?
An escrow account is designed to make sure all of your home loan bills are paid on time and in full. This protects both you and your lender against default. These costs include not only your mortgage principal balance and interest charges, but also your annual property taxes and homeowners insurance policy. When you make your mortgage payment each month, the escrow company pulls out some of it for taxes and insurance, collecting enough throughout the year to make the payments on your behalf when they come due. That way you are never stuck with having to come up with thousands of dollars every time you have to pay your property taxes.
What is an Escrow Refund?
Each year your escrow company conducts an analysis of your account to make sure they are collecting the appropriate amount for your bills. If your escrow account ever discovers that they are holding more money in the account than what is required, they are legally obligated to send you a refund check for the overage within 30 days. This could happen if your property taxes go down or you switch to a less expensive homeowners insurance policy.
You will also receive an escrow refund check if you refinance into a new loan and close your current escrow account.
Another reason for an escrow refund check is when you pay off your mortgage. At this point, if you have a balance leftover for principal and interest, it will be returned to you.
What Happens If My Escrow Account Has a Shortage?
Sometimes your escrow company will find that your costs have increased and they need to collect more money from you to make your payments. This occurs when taxes rise or homeowners insurance premiums go up. If a shortfall is discovered, the escrow company will contact you and let you know that you can either make a lump sum payment to cover the increase, or you can pay a higher monthly mortgage bill to compensate.
While it's great to get an unexpected check in the mail, if it is from your mortgage escrow company, just remember it is simply a refund of your own money.
If you have any mortgage related questions, please give us a call today!