I have mentioned previously the financial benefits to not maintaining an escrow account. Basically, instead of paying a few extra hundred dollars per month for insurance and property taxes to a bank, you can pay your own savings account this money and reap a small amount of interest on it (with today’s abysmal interest rates, the amount may only be less than $50, but wouldn’t you rather have that in your pocket than the bank’s?). Another vehicle you could use to reap some interest is by keeping your annual insurance and property tax money in a six-month CD that matures before the payment is due.
Intrigued? I know I am. With historically low home loan interest rates, more and more people are refinancing and taking advantage of the interest savings. An easy way to shed your escrow account is when you refinance your mortgage.
Should You Eliminate Your Escrow?
Warning: Make Sure You Have Savings Discipline Before Proceeding.
Before we proceed with discussing how to get rid of your escrow account in a mortgage refinance, I would like to give a word of caution. Since you will no longer have an escrow account, you will not be forced to pay several hundred dollars per month into an account for when your big bills are due on your home: homeowner’s insurance and property taxes. Because of this, you will want to mimic an escrow account in your own savings account or CD. This means you will need to add up your total for insurance and taxes, and divide that by 12 so that you know how much money you need to set aside each month.
If you know that you are not disciplined in saving money, then perhaps getting rid of your escrow account is not a good option for you. Think about it, you could be left with a bill of several thousand dollars at the end of the year and have nothing in an account to pay it.
However, if you know that you are disciplined in setting aside money for a big bill, then please proceed.
What Happens to an Escrow Account When Refinancing
What happens to your escrow account during a refinance depends on what lender you go with. If you stay with your current home lender, then most likely your escrow account will remain intact. However, if you refinance with a different lender, then your current escrow account will be closed and a check should be mailed to you with the remaining balance within 30 days of paying off your former lender. Note that if your new lender requires an escrow account (specifically in cases where you have a VA/FHA loan, or you do not have enough equity in your home to get rid of an escrow), then you may need to pay a prorated amount into your new escrow account to cover upcoming insurance and property tax expenses (some lenders require a cushion as well, so you may end up paying extra instead of just signing over your escrow check from the previous lender).
A Calculation to Determine If You Can Get Rid of Your Escrow Account
With certain loans, you are required to keep an escrow account no matter how much equity you have in your home. This includes the VA and FHA loans (for example, my husband and I have a VA loan, and so when we refinanced we were unable to get rid of the escrow account). However, if you have a traditional mortgage, then you might qualify. You need to determine whether or not you have 20% equity in your home with your new loan terms. Using your new home appraisal (most refinances require that you get a new appraisal done on your home), compute your loan-to-value ratio. If after dividing your new loan amount into the appraised value of your home you find that your loan balance is less than 80% of your home’s value, then you need to discuss escrow options with your lender.
Get Rid of Your Escrow Account During Your Refinance
No matter what you do, or how your calculation comes out, you can discuss escrow options with your new/current loan officer to find out if you can get rid of yours during the refinance process. If you are able to shed your escrow, then you may have a small windfall of money when that check comes from your closed escrow account. Find out when your insurance and property tax bills come due. Then figure out what you should do with that money: either jumpstart your escrow account savings if the bill is due relatively soon, or perhaps pay down part of the mortgage principle during the refinance process if you have lots of months to save for your payments.