A viable option to ease the financial burden of a mortgage is to refinance the payment. This refers to a process where the debt is paid off with another financing, creating a different debt. Simply put, it is substituting one loan for another. But what happens to the escrow account when refinancing is done?
Recall that the escrow account is managed by an intermediary lender between the buyer and seller, which helps the client pay off the mortgage debt per home.
What happens to my escrow account if I refinance?
The current loan debt is automatically paid off when refinancing a mortgage payment and passed to another lender. Different agreements can be reached when refinancing, depending on the lender and the type of loan purchased, but establishing a new escrow account agreement may be required.
Now, what happens to the balance already available in the old account? All funds already collected in the escrow account become what is known as impound reserves. The assets are restricted from being used to pay the refinancing lender. The customer pays several installments from the impound funds formerly in the escrow account.
Once billed, the existing escrow account is normally closed to make way for a new one to pay the new lender.
Basic steps to refinance a mortgage
Refinancing a mortgage includes the transfer of the servicer and, with it, the loan administration. In other words, the new servicer or lender may be handled differently than the old one, so here is a guide to refinancing.
Searching for a new lender
You can compare rates, credit, availability, and taxes to find a new lender. The new lender may charge a more expensive or cheaper tax than the previous one. This process investigates what best suits you based on the type of debt you have to help you make a good choice.
Search for all the documentation
Just as the client will evaluate the different lenders, the lender will also evaluate the client’s documents to see if it is beneficial for them to reach an agreement with this person.
The documents that are required when applying to a new lender to refinance the mortgage are the last two escrow account pay stubs, the last two W-2 forms showing the wages that have been paid, the taxes withheld, and the last two bank statements.
The funder will most likely ask for the spouse’s bank documentation if the client is married. If self-employed, i.e., self-employed without belonging to a company, the lender is likely to ask for more documents validating the upcoming debt solvency.
Once all documentation has been submitted to the lender, it will be analyzed to see if it is feasible to provide services to refinance the mortgage. The estimated time for the underwriting process is between 1 and 2 weeks; however, the appraisal process will take place during the underwriting, which may delay the process slightly.
This process refers to evaluating the estimated value of the mortgaged property.
A real estate professional, referred to as an appraiser, will evaluate the location of the property, the surface area, the materials with which it is built, the size of the lot, the state of maintenance of the home, qualities, lighting, distribution of the home, among other characteristics to calculate a hypothetical value of how much the house costs in net price to seek a resolution in case the house is worth more or less than the money the lender is granting for the mortgage.
Once all of the above steps have been taken, the client can refinance the mortgage, paying off the old debt and replacing it with the new agreement reached by the client and the lender. Creating, if necessary, another escrow account for the new debt process.