Netting Escrows: What Does It Mean And Should You Net Escrow?

During a refinance, netting escrows is an effective way to lower the principal balance of your new mortgage loan. Let’s take a closer look at how to take advantage of this option.

What Does Netting Escrows Mean?

Netting escrow, which is only available when you refinance your home loan, allows you to take the money in your existing escrow account and apply the balance as a credit toward the payoff of the new loan.

What Is An Escrow Account?

You should also understand the concept of escrow. Essentially, escrow is money your lender puts aside at the start of a mortgage and as part of each monthly mortgage payment to ensure your property taxes and homeowners insurance premiums get paid on time.

An escrow account allows lenders to cover these homeownership expenses ahead of time with the cash they collect from your monthly payment and deposit into the account. This way, you shouldn’t be surprised by a big bill on top of your mortgage payment and other bills.

How Does Netting Escrow Affect Your Refinance?

When you refinance, escrow netting allows you to apply your escrow account balance to the payoff amount of your existing loan. In other words, netting escrow can help you lower your principal balance for your refinanced mortgage.

Consider this example: You’re refinancing a mortgage with an outstanding $100,000 balance, and your escrow account has a $1,000 balance. Netting escrow will reduce the principal balance of your new loan by the amount of the escrow balance, resulting in a new loan for $99,000 ($100,000﹣$1,000).

Netting escrow can lead to a lower principal amount, potentially lowering your monthly payment if the interest rate and loan terms stay the same.

Can You Net Escrow With All Types Of Refinance?

Netting escrow isn’t an option for every type of refinance. The Federal Housing Administration (FHA) allows FHA loan holders to net escrow when refinancing. However, not all mortgage companies let borrowers net escrow on their refinance. Check with your mortgage provider to see if netting escrow is offered and whether you qualify.

Should You Net Escrow?

If you’re refinancing, a net escrow can be a beneficial opportunity to consider. But like all financial choices, there are advantages and disadvantages. Here’s a closer look at what you should keep in mind:

Benefits Of Netted Escrow

When you refinance, you have two options with your old escrow account:

• Pay the new escrow amount out of pocket. Once your loan is paid off, you’ll receive a check for the remaining balance in your previous escrow account.
• Use the balance in your escrow account to cover the difference for your new escrow.

The new escrow for your refinanced mortgage will be part of your mortgage costs either way. Netting escrow can be extremely helpful if you don’t have the cash to cover your new escrow requirement.

Netting escrow can also lower the principal balance on your new mortgage. Ultimately, a lower principal amount can help a borrower save money over the length of a loan’s term.

Drawbacks Of Netted Escrow

The disadvantage of netting escrow is that you won’t receive a reimbursement check for your original escrow balance refund. The funds get applied directly to the principal balance of your new mortgage.

The Bottom Line

Netting escrow may be the right move for your finances during a refinance. See if your lender offers this option. If you’re ready to move forward with a refinance, start a mortgage application with Rocket Mortgage^® to see if you qualify.