Can an Escrow Balance Apply on Mortgage Payoff?
- A mortgage escrow account is an account your lender opens to hold funds that it will use to pay your home insurance and property tax bills during the year. The lender calculates your escrow payment based on your total insurance and property tax liability for the year. Most lenders include your escrow payment in your mortgage payment. Lenders typically recalculate your escrow payments once per year to accommodate any changes in your property tax or insurance liabilities.
- Lenders who hold mortgage escrow accounts on behalf of their borrowers must comply with the regulations in the Real Estate Settlement Procedures Act, or RESPA. Under this act, lenders can require you to keep a cushion in your account, but the cushion can't exceed one-sixth of the combination of your yearly property tax and home insurance bills. If your balance exceeds this amount at the account's lowest point during the year, the lender must send you a refund check. Lenders must also refund the balance in the account if it closes.
- When you pay off a mortgage, RESPA requires the lender to refund the remaining escrow balance to you. The lender can't use it to pay down your mortgage balance, nor can it transfer it to a new escrow account. However, the lender can inform you of your right to apply this money to your mortgage balance or a new escrow account when it sends you the refund check.
- Even if you refinance with the same lender, it must refund the money in your original escrow account and open a new one. In most cases, it can't apply the balance of the original account to your new account even if you give it permission. Some lenders may not require you to keep an escrow account if the ratio of the amount you financed to the value of your home is low enough that you don't have to pay mortgage insurance.