When you refinance your mortgage, you have more to worry about than just the amount you borrow and your new payment. You also have to worry about your escrow account (if you have one). If you currently have the mortgage lender pay your real estate taxes and homeowner’s insurance, you have an escrow account. Many loan programs require that you set up an escrow account when you refinance as well.
Setting up an escrow typically means that you have to stock the account with funds to make sure there’s enough there when the lender has to pay your bills for you. But if you have a current escrow account, you may be able to ‘net escrow.’ Keep reading to learn what this means.
Understanding the Escrow Account
Before we can discuss net escrow, let’s look at the definition of an escrow account.
When your lender handles the payment of your real estate taxes and homeowner’s insurance, it’s an escrow account. You paid a certain amount when you closed on the loan to set up the account. At a minimum, borrowers typically pay 2 months of taxes and insurance upfront, but they sometimes have to pay more depending on the timing of the closing. Once you started making mortgage payments, you also paid 1/12th of your real estate taxes and homeowner’s insurance each month.
The money you paid toward your taxes and insurance went into your escrow account. Approximately 30 days before the due date of your taxes and/or insurance, your lender would pay the bills on your behalf. They get the money from your escrow account. You then continue to make the 1/12th payments to keep up with your balances and payments.
Understanding Net Escrow
Now, let’s say you want to refinance your mortgage that has an escrow account. This means you pay off your loan with your existing lender. It also means that the lender no longer has to pay your taxes and insurance. The money you have in their escrow account then belongs to you.
In a typical transaction, the lender sends you the balance of what’s in your escrow account approximately 45 days after you pay the loan off in full. But, you can ask the lender to ‘net escrow.’ This means rather than the lender sending the funds back to you, they send them to your new lender.
The new lender applies the funds to the new escrow account. What is left ‘the net amount due’ is then your responsibility. In short, it helps to decrease the amount of money you have to give the lender out of your own pocket to start a new escrow account.
How Does Net Escrow Help You?
When you refinance, again, it’s like starting over with a new loan. Your new lender will need money to set up your escrow account. If you are at least six months out from your next real estate tax or homeowner’s insurance due date, you typically only need to fund the account with two months of taxes and insurance money. If there are less than six months until your next due date, though, the lender may need to collect more money up front in order to have enough to pay the bills.
If you have to fund the account from your own pocket, you could end up forking over several thousand dollars to make sure there’s enough to cover the taxes and insurance. If you net escrow, though, you basically roll the funds over from one account to the next. This could decrease the amount of funds you have to provide out of your own pocket. In some cases, you may not have to provide any money out of your own pocket.
Do All Lenders Net Escrow?
Unfortunately, lenders aren’t required to net escrow. This means you may find some lenders that don’t agree to do so. While the bottom line comes out the same – you pay the funds up front and then get reimbursed from your escrow account with your original lender, you still have to come up with the money at the closing.
If you need to net escrow, that should be one of the questions you ask before you apply for the loan. Don’t forget, though, you have to make sure that your current lender is willing to do it as well. If not, you may have to wait to refinance until you don’t have to put as much money into your escrow or find a different lender that is willing to help.