Escrow refinancing the mortgage
In a real estate transaction, an escrow is used to hold a buyer's earnest money temporarily. Think of it as a security deposit to show the seller how serious you are in purchasing the property. This earnest money gives you a certain amount of time to complete the home buying process. Another escrow is also used for your property taxes and insurance.
When you decide to take out another mortgage loan to pay off the first mortgage, the lender may require you to establish another escrow account. Also called "impound reserves", these funds are usually collected at closing, and your lender determines the amount. These funds will be used for expenses related to your home refinance.
When your loan-to-value ratio is more than 80%, which translates as a higher risk for the lender, you will need to establish an escrow account. The lender will then collect funds from your property taxes and homeowners insurance and hold the sum of money in your escrow account until the payments are due. The escrow money ensures that you won't default on your insurance provider and your tax payment.
Escrow accounts are both beneficial to the lender and to the homeowner. Non-payment of mortgage for a certain period can lead to foreclosure. Homeowners who don't pay their property taxes may also have their homes foreclosed. Having an escrow account avoids this scenario. The lender won't have to deal with your foreclosed home, and you won't have to worry about not paying for your insurance or taxes, as you have established an escrow account.
What if I have a previous escrow account?
When refinancing your mortgage, the original account will remain with your old loan. Unfortunately, you can't transfer these funds to the loan, albeit with the same lender. The taxes and insurance that you have made will be returned within 45 days.
Upon closing, you will need to come up with the money to fund the new escrow account. It won't be possible to use the previous funds as they are sent back to you in over a month.
How much escrow is required for a refinance
Your lender will determine how much money to collect upon closing your refinance loan. It's usually calculated by adding your homeowners insurance premium and your annual taxes. The lender will divide the sum by 12, and that's how much money you need to pay for your escrow account.
The lender may require you to deposit 2 months of escrow installment payments to provide a cushion, in addition to the certain number of monthly installments that you need to make.
How the process works
Just like in your first mortgage, there are steps needed to complete the home refinance loan. When the home refinance has been closed and you have fully signed the documents, notices, and disclosures, you will be given a 3-day rescission period.
You are still allowed to think about your home refinance and cancel it if you change your mind. Otherwise, the escrow agent will complete these steps:
- The escrow agent will ask the lender for the refinance funds. Your lender will transfer or wire this money to your escrow account. Just a note: As soon as the lender wires the money to your escrow account, you will start paying the interest for your new loan as well as pay interest for your old mortgage until it's completely paid off.
- The escrow agent works with the title company to pay your old mortgage via wire transfer. You will stop paying interest on your old mortgage when the funds are received. The money is wired to your old lender. A check is another option, but you will need to pay the interest on your old loan until the lender gets the check.
- To make the refinance mortgage official, your escrow agent will record the new mortgage at the county recorder's office.
Choose the right escrow company when refinancing
While it's essential to select the best lender when refinancing your mortgage, it's just as vital to choose the right escrow company. Choose a 3rd party escrow company that can maximize your savings for your new mortgage.
One of the most important factors to consider is the reputation of the company. Ensure that they don't practice unethical behavior when working with clients. It's also important for them to have enough experience in the industry. How long have they been in business? Who do they serve? What kind of escrow services do they provide? Do your research and shortlist those companies who are responsive and quick in communicating with you.
Most importantly, compare the costs each company provides. The right escrow company should be able to give you an accurate estimate of the costs involved in refinancing your home. Avoid those that offer very low prices as they may surprise you with additional fees upon closing.
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