Understanding the escrow process is important when refinancing your home. Since real estate transactions include complicated components, escrow agents are in place to help lenders track and disburse money according to the agreements made.
In a mortgage refinance, you obtain a new loan to pay off a current home loan debt. Depending on the type of refinance loan, the new lender may require you to establish an escrow account. When refinancing a mortgage, escrow funds collected at closing are known as “impound reserves,” and their amount is determined by the lender. An escrow, or impound, account requires you to send in payments for certain expenses each time you send mortgage payments to the lender.
Escrow Accounts
Escrow refers to a third-party service that provides an easier method for managing your property tax and homeowner’s insurance payments. When a buyer and seller initially arrive at a purchase agreement, they select a neutral third party to act as the escrow agent. The escrow agent collects a deposit from the buyer that is equal to a small percentage of the sale price. This deposit is known as “earnest money”. In exchange, the seller takes the property listing off the market. Until the final exchange is completed, both the seller’s property and the buyer’s deposit are said to be in escrow.
Refinance
Refinancing your home loan could lower your current mortgage payment while consolidating other debt, if the available equity within your home meets certain lending requirements. If you are refinancing with your current home lender, your escrow account may remain intact. However, if you are refinancing with another lender, your current escrow account will be closed, and you should receive a check for the remaining balance within 30 days of paying off your former lender.
When Escrow Is Required
A lender requires an escrow account when a refinance results in equity of less than 20 percent, which results in a loan-to-value ratio of more than 80 percent. The loan-to-value ratio, commonly called LTV, compares the loan balance to the home’s appraised value. Loans with higher than 80-percent LTV are considered higher risk by the lender and, therefore, require escrow impounds. The lender collects a portion of the homeowner’s insurance premium and property taxes, and holds the funds in escrow until payments are due. The lender then remits payment to the insurance provider and tax authority on behalf of the borrower, ensuring on-time and continuous payments.
During a refinance transaction, your new mortgage lender could use allowable portions of your home equity to fund your escrow balance, thus eliminating a need for you to pay out-of-pocket costs at the settlement table. However, if the equity does not exist, you may need to pay a prorated portion of your escrow requirements. Some mortgage lenders may require an additional two-month cushion toward the creation of your escrow account. Due to escrow adjustments, your lender uses the cushion as a safeguard.
The Previous Escrow Account
When you opt to refinance a loan, the original escrow account remains with the old loan. Escrow funds, unfortunately, cannot be transferred to new loans, even if it’s with the same lender. All the property taxes and insurance you have made to that date, since the last payment was made, will be returned to you within 45 days via wire transfer or check.
Using Old Escrow Funds
Because the funds will be sent to you at a later date, it is usually impossible to use held escrow funds from a previous loan to apply it toward your new escrow account on the refinanced loan. It will cost more money out of your pocket to fund your escrow account with your refinance loan, and depending on the time of year that you are refinancing, the lender may require a substantial amount in taxes to be pre-paid into escrow.
In a refinance, a homeowner replaces his or her current mortgage with a new mortgage. The new mortgage often comes with more favorable terms to the borrower than those of the current mortgage. When the new mortgage has been finalized with a new lender, that lender will then make use of the escrow process to disburse money to the old lender to cover the old mortgage.
Establishing Reserves
The lender determines the minimum amount the escrow holder must collect upon refinance closing. To calculate this figure, the lender adds the homeowner’s insurance premium and the annual tax bill amounts. The sum divided by 12 is the monthly installment the borrower pays into the escrow account. At closing, the lender instructs the escrow agent to collect a specified number of installment payments to establish the reserves. The lender draws from these reserves when the first insurance premium and tax payments become due.
Tax Due-Date Impact
The time of year that the refinance closes affects the amount of escrow reserves collected at closing. In general, the closer your closing date is to the last tax collection date, the less money you deposit into escrow, as the most recent installment is already paid. When you refinance, the lender verifies that the last installment was paid. If you haven’t paid, you must cover the cost out-of-pocket or use part of the refinance proceeds to pay the taxes. For example, in California, a semiannual installment of property taxes is due on Feb. 1. If your refinance closes in the month of February, you need only one month of escrow impounds in the reserve account at closing. Your upcoming mortgage payments with escrow installments replenish the account for the following semiannual due date.
What Happens at Citrus Heritage Escrow?
During the escrow period, our title department begins researching and examining all historical records pertaining to the subject property. Barring any unusual circumstances, a commitment for title insurance is issued, indicating a clear title or listing any items which must be cleared prior to closing. The commitment is sent to you for review.
Your escrow officer follows instructions on your contract, coordinates deadlines, and gathers all necessary paperwork. For example, written requests for payoff information (called “demands”) are sent to the Seller’s mortgage company and any other lien holders.
When choosing an escrow company there can be many important factors to evaluate. Fees, location, staff and even recommendations from friends and colleagues are all things to consider. With Citrus Heritage Escrow by your side, you can rest assured that when you receive your settlement check, you’ve gained the maximum benefit from your home sale or purchase.
Call us today with any questions or concerns. Our professional Escrow Agents will help you through this exciting yet confusing process. (951) 335-7200