How Does Escrow Work when Refinancing?

Becoming a homeowner comes with a fair share of big financial decisions. Sometimes, opting to refinance your home after some time is the best way to make sure you are getting the most favorable terms on your mortgage. But what happens to escrow once you refinance your mortgage?

Escrow is a significant part of the home-buying process, and understanding it in its entirety helps you realize its importance. So, today we will answer the question, ''How does escrow work when refinancing?'' and help you comprehend what happens with your funds during this process. If you want to find out what you can expect when refinancing your home, keep reading.

How Does Refinancing a Home Work?

Refinancing a home means getting a new mortgage to replace the old one. This can be a good idea if you want to get a better interest rate or change the length of your mortgage. When you refinance, your old mortgage is paid off, and the new one starts. Part of this process includes putting money into escrow.

When you refinance your existing mortgage, the new lender pays off the balance of your old loan. The remaining funds are used to finance a new loan with more favorable terms. After that, the process of how escrow works is similar to when you initially purchased your home.

A new escrow account will be established with the new lender who is responsible for collecting your monthly payments. The funds are then used to pay off your insurance premiums, property taxes, and other fees.

When Should You Refinance a Mortgage?

Refinancing a mortgage is an attractive option for homeowners who want to gain access to better terms and save money. Some common reasons you might opt for refinancing are:

• You can get a lower interest rate than your current one. Many lenders say that reducing the interest rate by 1% is enough reason to refinance a home, while others advise to only refinance your home if you can reduce the interest rate by 2%.
• You have the opportunity to take out a different loan that would shorten the term of your loan without big changes in your monthly payments.
• You want to switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage. While ARMs often have lower interest rates initially, you can experience a hike in rates over time. That’s why people sometimes decide to move to a fixed-rate mortgage, as it can result in lower interest rates and more stability.
• You have equity in your home that can be used for other purposes such as consolidating debt or funding renovations.

No matter what your motivation is for refinancing your home, it's always important to consider the fees associated with the process, as well as any long-term implications.

What Happens to the Escrow when You Refinance?

When you refinance your home, a new escrow account is established with your new lender. This means that the old one will be closed, and the funds will be used towards paying off your old loan.

However, if there is a positive balance in the old account, you will get an escrow refund after the new lender has paid off your old loan. Unfortunately, escrow funds cannot be moved to new loans, even if they are with the same lender. You will get a refund for all property tax and insurance payments you have made to that account since the last payment, typically within 45 days. The amount will then be used towards your new loan or credited to you at closing.

In some cases, the refund of escrow after refinance may be larger than the amount needed to pay off the previous loan. This is because your new lender may be able to get a better deal on insurance and taxes for you, resulting in a lower escrow payment.

It is typically impossible to apply held escrow funds from a previous loan to your new escrow account on the refinanced mortgage because the money will be sent to you later. So, you need to have extra money available at closing to fund your new escrow account. The lender might also request that you pay a sizable amount of taxes into escrow in advance, depending on the time of year you are refinancing. If you're refinancing later in the year, this is something to keep in mind.

How Is Escrow Calculated on Refinance?

When you refinance your home, your escrow payments will likely change as well. This is because the amount of money that goes towards insurance and taxes can vary from one loan to another.

Your new lender will use your annual property taxes and insurance premiums to estimate escrow. This information is then used to calculate how much you need to pay each month for your escrow account. Depending on the new terms of your loan, this amount may be higher or lower than before.

For instance, if your annual property tax bill is $2,400 and your insurance premiums are $1,800, your lender would divide these amounts by 12 to determine how much needs to be paid each month. That means you would have to pay $200 for taxes and $150 for insurance each month

Does Escrow Go up when You Refinance?

It is possible for your escrow payments to increase when you refinance, especially if the terms of your new loan require a larger down payment. This means that more money will be needed in the escrow account to cover the insurance and taxes associated with the loan. However, it is also possible that your escrow payments will go down. If your loan has lower interest rates or if you have a shorter repayment period, then the amount of money needed in escrow could decrease.

Work with Reliable Escrow Holders

Refinancing your mortgage can be a great way to access better terms and save money. However, it's important to understand how escrow works when refinancing so that you are aware of any changes in your payments. Knowing the details of the process can help you make an informed decision and ensure that you get the best terms possible.

Understanding and taking care of escrow can be very stressful for both first-time buyers and those with multiple properties. If you’re having trouble differentiating between the different types of escrow, learning the rules, and understanding how it works, you have nothing to worry about. Lightspeed Escrow is at your service!

With our expedient services, you can have peace of mind knowing that experienced escrow professionals are handling every step of this complex process. We aim to provide you with a smooth, quick, and stress-free escrow experience. So, no matter what type of real estate transaction you need help with, you can contact us and rely on our experts to take care of everything.