Escrow refund: What is it and when does it occur?

When you buy a home, your mortgage lender will typically set up an escrow account to hold money for expenses like property taxes and homeowners insurance. This way, you don’t have to manage those bills on your own because they’re part of your monthly mortgage payment. Sometimes you end up with surplus funds from this account, and you may be entitled to an escrow refund.

Let's break down exactly what an escrow refund is, why you might receive one, and how you can make that extra money work for you.

What is an escrow account?

An escrow account is set up by a third party used to hold money for a specific use. You can think of escrow as a convenient financial savings tool set up by your mortgage lender to pay large property-related bills on your behalf. When you make your mortgage payment each month, a portion will go to your escrow account. This money is held until it’s time to pay your homeowners insurance or property tax payments. Whenever your homeowners insurance and property insurance are due, your lender will take the appropriate amount out of the escrow account and make payments on your behalf.

Because property taxes and insurance premiums change over time, your lender must estimate these costs and divide the sum into 12 payments to make these costs more manageable. Each year, they perform an escrow account analysis to review your actual bills and compare them to the estimated payments. This analysis will determine if you have a surplus or a shortage in your account.

What is an escrow refund?

An escrow refund is excess money returned by your lender from your mortgage escrow account. This surplus typically occurs when you pay too much toward your escrow account or your mortgage lender overestimates the amount you’ll need for property taxes or homeowners insurance payments. Your lender will notify you in writing about the status of the account, often providing a statement explanation detailing the financial breakdown.

How are escrow refunds issued?

If you’ve closed on your current loan, whether through refinancing or selling your house, you’ll receive a check within 20 business days.

If your annual review uncovers extra money, you can look forward to a refund of unused funds. Your mortgage servicer will typically mail a physical check to your home address, though some may offer direct deposit.

Your refund timeline largely depends on the specific reason for the refund, but federal refund regulations exist to ensure you get your money in a timely manner. For example, under the Real Estate Settlement Procedures Act (RESPA), if your annual analysis reveals a surplus of $50 or more, your servicer must issue a refund within 30 days.

When do you get an escrow refund?

You can receive an escrow refund at any time of the year. Typically, your mortgage servicing company will do an escrow analysis once a year to see whether your escrow payment matches up with the money you owe for things like insurance and tax payments.

Even though mortgage servicers do their best to estimate how much money you’ll need to meet obligations, there are situations outside their control that can lead to a surplus in your escrow account. 

Common scenarios that can lead to surpluses and an escrow refund include:

• Mortgage payoff: You’re eligible for a refund for the remaining balance in your escrow account after paying off your mortgage. Your lender will give you a written notice of the loan closure and how much you’ll be refunded. You should receive your escrow refund within 20 days of payoff.
• Annual escrow analysis surplus: When your lender’s annual review occurs, you’ll either receive a refund or have the balance carry over to the next year’s payment. Each state schedules reviews at different times of the year. Check with your lender or state regulators to determine when your review is scheduled. 
• Refinancing: When you refinance your mortgage with a new lender, any extra money in the escrow account will be refunded. In some cases, funds will be transferred to your new lender’s escrow account.
• Reduction in property taxes or insurance premiums:If your homeowners insurance premium or your property taxes decrease, this can lead to a surplus in your escrow account. When this occurs, any overpayments due to previous rates will be refunded to you.

Can I be ineligible for an escrow refund? 

In some cases, you may not be eligible for an escrow refund if your remaining balance falls below a certain amount. For example, some lenders may not refund you excess funds unless the amount is $50 or more.

Your mortgage lender could also choose to apply the excess amount toward next year’s escrow payments instead of refunding you the money. For example, if you had an extra $500, your lender could roll that over to put it toward your insurance and tax payments for next year.

What if I’m selling my home?

Selling your home and using the buyer's funds to pay off your remaining mortgage balance officially ends your legal obligation to that specific escrow account. When you sell your home, your lender will close your escrow account and refund any remaining funds within 20 days.

What should you do with an escrow refund?

The money refunded is yours to do with as you wish. Some ways you can use it toward housing costs include:

• Extra payment toward your mortgage principal: Putting your excess escrow funds toward bringing down your loan balance can save you on interest costs and get you to debt-free status sooner.
• Pay for home maintenance costs: Most homeowners pay around 1% - 2% each year toward home maintenance costs, which can include minor repairs like fixing a faucet or bigger purchases like replacing a washing machine. Consider setting this money in a separate savings account earmarked for home maintenance.
• Save for future escrow payments: You could ask your loan servicer to roll over the excess escrow payment to next year’s payments. Alternatively, you can hold onto your refund in a separate savings account and use it toward the escrow part of your mortgage payment.
• Add it to your emergency fund: Having a fully funded emergency fund can help you prepare for any unexpected scenarios like a job loss or a medical emergency. Consider using your escrow refund to help you build this financial cushion.
• Use it for short-term goals: You could also use your escrow refund to pay down high-interest debt like credit cards. You could also put your escrow refund toward covering vacation or holiday expenses.

Whatever you choose, take the time to see where your escrow refund will make the most impact before cashing in your check.

FAQ

Here are answers to a few frequently asked questions about escrow accounts and refunds.

Who sends the escrow refund check?

Your current mortgage servicer, the company you send your monthly payments to, is responsible for issuing your escrow refund check. If your loan was transferred to a new servicer just before you paid it off, the company that finalized the payoff will send the funds.

What happens if there's a shortage in my escrow account?

If your property taxes or insurance premiums go up, your account might not have enough money to cover the bills, creating a shortage. Your lender will typically give you the option to pay this shortage as a one-time lump sum or spread the difference across your next 12 monthly mortgage payments.

Are escrow refunds taxable income?

An escrow refund does not have tax implications and is not considered taxable income because it is simply a return of your own money that was held to pay your bills.

How does a seller get money from escrow?

The seller will receive their remaining escrow balance directly from their mortgage servicer after the buyer's funds pay the mortgage in full. The servicer will close the account and issue a check or direct deposit for the remaining funds to the seller's new address within 20 days.

Will I always get an escrow refund when selling?

You will only receive an escrow refund if there is a remaining balance in your account after your final property taxes and insurance premiums are paid. If your account happens to be short at the time of the sale, you will need to cover the difference out of pocket or from your sale proceeds at closing.

The bottom line: Be patient when expecting an escrow refund

An escrow refund can be a nice financial surprise that may happen after you sell a property, pay off a loan, or benefit from a drop in property taxes. While it can take a few weeks for the funds to reach you, knowing what to expect can help the process go smoothly.

If you’re ready to buy a home, you can learn more about escrow accounts or apply for a loan through Rocket Mortgage.