Escrow accounts are used to hold funds for paying pop-up expenses like property taxes and insurance premiums when they’re due. It’s a helpful way to have these expenses covered by a third party and paid on time, so you don’t have to juggle them with your other bills. When mortgage companies perform their annual escrow account analysis, they may stumble upon an overage or shortage of funds on your escrow account.

The phrase “ignorance is bliss” is a poor mantra to live by and certainly no way to act towards your finances. A surplus of funds on your escrow account can actually present an enticing opportunity to get a lucrative escrow refund. Knowing the ins and outs of escrow refunds will allow you to get your money back in certain situations.

To keep you in the loop, we’ll go over what an escrow refund is, how it works, as well as when you may qualify for and receive one. Ready to cash in some unexpected funds?

What Is an Escrow Account?

If you’ve never made a mortgage payment before, you might not be familiar with escrow accounts in the first place. So, let’s start with the basics. An escrow account is essentially a savings account that’s managed by mortgage servicers to make monthly payments for estimated property taxes and your homeowner's mortgage insurance premiums on your behalf. Your escrow balance is the amount of money that is held for you in your escrow account.

Each month, a portion of your mortgage payment will go into your escrow account, and your mortgage servicer will use that money to pay your taxes, mortgage, and homeowners insurance bills when they are due. Even if an escrow account isn’t necessary, it’s still a good idea to use one as all the payments and budgeting will be managed for you, and you’ll be able to spread out your taxes and insurance payments over the year instead of paying a large sum all at once.

What Is an Escrow Refund?

Since the money in the escrow accounts is for future payments, things can change. For various reasons, which we will later explain in more detail, sometimes you may end up with some extra money in your escrow account than you need to pay your bills. Escrow accounts are governed by the Real Estate Settlement Procedures Act (RESPA), and RESPA has a limitation on the amount of money that can be kept in an escrow account.

If your escrow contains excess funds, this means you have an overage. Lenders are required to refund you if your escrow account balance is over the limit. An escrow refund allows you to reclaim the excess funds stored on your behalf by a mortgage servicer.

If an escrow account analysis shows that the escrow account has an overage, you’re eligible for an escrow refund and will receive an escrow overage refund check with the remaining balance. You could get an escrow refund if its balance becomes higher than necessary or once you've completely paid off your mortgage.

What Is an Escrow Balance Refund?

Any time an existing escrow account is closed and there are remaining funds in it, you are eligible to receive an escrow balance refund for the remaining balance on the account. If your mortgage is fully paid off, you should receive a check in the amount of any remaining balances from your lender within 20-30 business days.

What Is a Refinance Escrow Refund?

Wondering what happens to your escrow balance when you refinance? Mortgage refinance means that loan servicing may be transferred from one loan servicer to another. Suppose you’re refinancing your mortgage with your original mortgage lender. In that case, your existing escrow account funds will generally remain intact, so there will be no overages that call for an escrow refund unless the property tax bills or insurance premiums have changed.

However, if you refinanced your mortgage with a different lender, a new escrow account will be opened and your previous one closed. In this case, you’ll receive a refund check with the balance surplus in your original escrow account.

What Is an Escrow Deposit Refund?

An earnest money escrow deposit is also refundable. In most U.S. jurisdictions, the earnest money deposit held in escrow during the contract period must be returned if a buyer properly walks away from a deal. This means you can get an escrow deposit refund if you are backing out of the purchasing agreement before specific deadlines and didn’t break any contract rules.

What Is Net Escrow?

When you refinance a mortgage, it’s like starting over with a new loan. Instead of paying the new escrow amount out of your pocket, you can ask the old lender to “net escrow.” This means rather than the lender sending the funds back to you, they send them to your new lender. You can use these funds to cover the difference for the new escrow account.

Mortgage Escrow Refund Rules

You have an “escrow surplus” or “escrow overage” if the quantity of excess money in your escrow account exceeds the permissible cushion. The federal government allows banks to cushion their customers’ escrow accounts by up to one-sixth the estimated amount. This helps to assure the bank that it will not have to use its funds to pay the bills. It also increases the likelihood of an escrow overage.

Account overages must be handled according to specific RESPA rules and laws, including amounts to be returned to account holders. Lenders are subject to penalties if they mishandle escrow funds.

Let’s go over some of the most important ones:

1. The excess amount on the escrow account must be more than $50 to be able to request an escrow refund
2. If the overage in your escrow balance is less than $50, the mortgage lender can keep the amount in the account to service future bills
3. There are no rules or limits regarding the maximum amount of money you can receive through an escrow refund, as the surplus money is rightfully yours.

When Are You Eligible for an Escrow Refund?

As mentioned above, escrow funds are limited in the amount of your money they can hold. If your escrow account has excess funds (more than two months’ worth of future payments), you are eligible to ask for that money back if the excess amount is more than $50. Escrow refunds can occur for several reasons, the most common ones being:

1. You’ve entirely paid off your mortgage
2. You’ve paid more into your escrow than necessary
3. You’re closing or refinancing your escrow account
4. You’re switching up insurance companies for a better rate
5. Property tax bills are lowered

However, keep in mind that you must be current on your payments to be eligible for a refund. Otherwise, your mortgage servicer can be allowed to keep the surplus to use for paying future bills.

What Is an Escrow Refund Check?

An escrow refund check, also known as an escrow surplus check, is the check you will receive for your escrow refund to be able to cash in the excess funds in your escrow account.

When Will I Get My Escrow Refund Check?

If you are eligible for an escrow refund, you’ll likely receive the check once your lender has completed their annual escrow account analysis. This typically happens around the time the loan originated. RESPA requires the lender to return the funds to you within 30 days after the escrow analysis and identifying the overage.

However, it’s possible that you may need to ask to receive the escrow refund check. You can request a refund at any time of year if you’re eligible.

When Will I Get My Escrow Refund After Refinancing?

The exact turnaround time of a refund check is not always certain. You should receive your escrow refund within 30 days of your former lender receiving the mortgage payment from your new lender. Still, lenders vary in their refund processing times, and if your former lender doesn't refund your check within a month of closing, you may have to follow up or contact the lender to speed up the process.

What Should I Do With My Escrow Refund Check?

So, it turned out you had surplus funds in your escrow account at the end of the year and received an escrow refund check from your mortgage lender. Now, you’re wondering what you should do with these funds.

The good news is there's no universal "best" way to spend this surprise money. It all depends on your financial situation and your personal preferences. After all, the money is yours to do as you please, and there are tons of ways you can utilize your escrow refund!

How to Calculate Escrow Refund / Overage

Calculating your escrow refund, that is, the overage you have in your escrow account, is not as complex as it might seem. Simply multiply your monthly mortgage payment by three to account for next month's payment plus the two-month cushion. The amount you get is the maximum amount the mortgage servicing company can keep in your escrow account under RESPA.

After that, compare this number against the actual balance in your escrow account. If there is a surplus of over $50, congratulations – you’re eligible for an escrow refund in that amount!

Another way to calculate potential escrow overage is to know the current balance in your escrow account. Add the 12 monthly escrow payments that you will be making during the upcoming year. Then, simply deduct the estimated disbursements for property taxes and insurance bills. If there is money left, then you’ll have an escrow overage.

The Bottom Line

Setting up an escrow account is a form of “trust” - it offers a convenient way to pay for taxes and insurance so that the transactions can run seamlessly. Sometimes, they can even surprise you with the opportunity to get some extra money back.

With Lightspeed Escrow, you can expect fast, low-cost and transparent transactions on any real estate escrow service you need throughout Southern California. We pride ourselves on error-free transactions and complete transparency from the start. Get in touch for reliable escrow services to keep your escrow account in good hands and have someone to keep a close eye on your escrow balance and potential escrow refund.