How Often Is Mortgage Escrow Refunded?

Miscalculations

If you escrow your taxes and insurance, then a portion of your monthly mortgage payment goes into the escrow account. However, local authorities can raise property taxes midyear, while insurance firms can alter the cost of your insurance premium. Your lender estimates your annual escrow cost once a year, but if your tax or insurance costs rise or fall, you will end up with a surplus or a deficit in your account. Legally, a lender can keep an overage in an escrow account as long as it does not exceed one-sixth of your projected annual escrow costs.

Legally, your lender has to balance your escrow account at least once every 12 months. Typically, your lender balances the account for the first time precisely one year after you make your first mortgage payment. Your lender then balances the account on that same date in subsequent years. Your account effectively resets during the balancing process. If you have a shortage in the account, then your lender recalculates your monthly payment to raise enough funds to recoup the shortfall over the next 12 months. If an overage exists, your lender must send you a refund and you usually receive this check within a few weeks of the account being balanced.

If you do not pay your property tax, the local authorities can place a lien on your home. If you then default on your mortgage, your lender has to satisfy that lien before it can foreclose. If you pay down your mortgage and have significant equity in your home, your lender may allow you to self-escrow. Furthermore, if you had less than 20 percent equity in your home when you financed it, then you probably had to buy mortgage insurance, which covers your lender's losses if you default on the loan. You normally have to escrow mortgage insurance payments, but your lender must drop the insurance once you have more than 20 percent equity in your home. Therefore, you may get a refund once you pay down your mortgage balance so you have at least 20 percent equity.

The lender that holds your loan also acts as the agent and presides over your escrow account. Your escrow account ceases to exist when you pay off your loan. If you pay your balance down to zero, you should get a refund of any money that remains in the escrow account. If you refinance your loan, your lender must close your escrow account and transfer the funds to an escrow account held by your new lender. If your new lender does not require you to escrow, then your former lender must send you an escrow refund when you refinance.