You want to refinance and think you have it all figured out. You know you need up to 5% of the loan amount for closing costs and you have that money set aside. But, did you also know that you need money for the escrow account?
This account is set up to help you pay your taxes and insurance. Not all borrowers are required to set this account up; it depends on your loan type. For example, VA loans do not require you to set up an account for taxes and insurance, but FHA loans do. Conventional loans require them for most loans that have an LTV of 80% or higher. But, it also depends on your lender’s requirements, as some lenders require the account even if the program does not require it.
What is an Escrow Account?
The escrow account really works to your advantage. It’s the lender’s way of helping you stay on top of your taxes and insurance. Each month, you’ll pay 1/12th of the annual cost of your taxes and insurance. The lender then pays these bills for you – all you have to do is pay your mortgage bills on time.
The lender continually monitors the escrow account to make sure that you always have enough funds to cover your expenses. Most lenders perform a formal annual review that either decreases or increases your mortgage payment according to what your tax and insurance bills did that year. You can always ask for an informal escrow account review if you think your account is not properly funded, though.
Putting Money In Escrow
Just how much money you need to set up an escrow for a refinance is a tricky situation. There isn’t a certain number we can tell you that you will need. It depends on when your taxes and insurance are due compared to the date you take out the new loan.
If your property taxes are due shortly after you refinance your loan, be prepared to bring a hefty amount of cash to the table. You will have to fund the account with enough to cover the taxes minus any payments that will occur between now and then. This makes up for the time that you don’t have to make up those payments.
If your property taxes were just paid and you have another year before they are due, you’ll need less money to fund your account. Many lenders require you to bring at least two months of escrow payments to the closing though. This helps them set up a cushion should your taxes and/or insurance increase in the next year. This way your account never runs short.
Getting Your Old Escrow Money Back
When you refinance, you cannot just transfer your escrow account. You have to start from scratch. Depending on the timing, this could mean that you have a large sum of money sitting in the old account. While you can’t transfer it, you will get the money back. It may take up to 45 days to receive it, though. You should discuss your options for a refund with your lender to make sure you know when to expect the funds.
If your lender and/or loan program requires an escrow account, consider it a way to keep yourself on track. While it will increase your mortgage payments slightly, it’s a way to make sure your taxes and insurance are paid on time. Without timely payments on these two bills, your status in your home could be at risk, so it’s a way to safeguard against anything bad from happening in the future.