Where Do Escrow Funds Go When You Refinance?
When refinancing an existing mortgage, it is vital to understand the escrow process and what happens to the funds. This is especially true if you are considering refinancing because you are interested in bringing down the interest rate on your mortgage loan. Even if an escrow officer helps lenders keep track of and distribute the money needed for the mortgage, a little bit of knowledge on the subject can go a long way.
According to Ramsey, all mortgages require a monthly payment that includes the principal repayment, prorated property tax, prorated homeowner's insurance payment, and interest. Lenders hold these payments for taxes and insurance in an escrow account. The borrower obtains a new loan to pay off the existing debt in a mortgage refinance; as a result, the new lender requires the debtors to open another escrow account. That's why we should first learn about escrow accounts and how they function. It might seem complicated at first glance, but this concept is very straightforward once you have the basics down.
What is an escrow?
Escrow is a third-party service that makes it easier to manage payments. For example, when the borrower makes a monthly payment, the lender or mortgage company holds their taxes and insurance in escrow. Then, when bills are due, the lender pays the taxes and insurance on the borrower's behalf (via Rocket Mortgage).
Typically, all parties involved will agree on escrow at the time of sale. It is a legally binding agreement that prevents deals from falling through, unpaid taxes, and more (via Investopedia). It is also used to negotiate a price on a house. Buyers placing money in escrow shows the seller that they are serious about purchasing, resulting in the seller withdrawing the property from the market.
Most people use escrow because it makes their lives easier. It provides many advantages to the borrower and simplifies the process of owning property. The key to making the best decision is to weigh the long-term financial consequences of opting out versus staying in. As stated by the Consumer Financial Protection Bureau, if borrowers choose not to use an escrow account and fall behind on their payments, they may face significant penalties. For instance, they may lose their homeowners' insurance, and the tax assessor may place a lien on their property. In the worst-case scenario, they may face foreclosure.
What happens to the escrow account and its funds when refinancing?
According to RISMedia, the initial escrow account will stay with the old loan when refinancing the debt. Although the lender is the same, transferring escrow funds to the new loan is rarely possible. All property tax and insurance payments made by the borrower to that account since the last payment will be returned within 45 days via wire transfer or check.
Because the funds will be delivered to the borrower later, it is usually not possible to transfer held escrow funds from a previous loan to the refinanced loan's new escrow account (via Citrus Heritage Escrow). In a refinance, the new mortgage often has better terms for the borrower than the current mortgage. When the new mortgage is completed with a new lender, that banker will use the escrow process to pay the old loaner to cover the old mortgage.