When a client enters into a contract for the purchase and sale of a property through a mortgage, he or she must establish specific terms regarding the payment for the house. In some cases, the interested parties pay 20% of the house’s value, which is deposited in an escrow account.
This account is managed by the lender and is used monthly to pay the cost of the mortgage, property taxes, and private insurance. The escrow account is held until the house is paid off in full, but what happens to my escrow when I sell my home?
What is an escrow account, and how does it work?
An escrow account is a neutral account that belongs to neither the buyer nor the seller. It is managed by a lender to keep money and valuable documents safe until the transaction is completed. At the end of the contract, the capital and papers are sent to the respective owners.
It is an efficient method that acts as an impartial arbiter so that neither party takes precedence over the other. There are two types of escrow accounts, one used to pay for the purchase and sale of the property and a second to pay off the mortgage.
For this text, we will consider the second one. After purchasing a property, lenders request opening an escrow account to pay taxes and insurance. This is in the homeowner’s name and holds the money paid to the lender. The function of this bank account is as follows:
- The mortgage company sets up the escrow account after closing the sale. This first step is called setting up the account
- The owner sends monthly payments to the escrow account as part of their mortgage agreement
The sole purpose of the escrow account is to provide a safe place to pay for housing expenses. It avoids multiple transfers each month and makes the process easier. In most cases, you should have two months covered in advance as a guarantee if the payment of taxes or insurance increases.
What happens to escrow when you pay off your house?
The escrow account is a safe place to deposit the monthly payment related to the mortgage. This means the fixed amount, the taxes, and the homeowner’s insurance. If you are here, it is because you wonder what happens to my escrow when I sell my house.
Although some people would think that you would have to pay more, do additional paperwork, or keep these payments, the truth is that when you sell your house and close the contract, you no longer have to pay these bills. In other words, the escrow account disappears, and you will receive a refund from the lender for the balance in your favor.
During this process, you should consider how the escrow account behaves in each phase:
Phase One: During the sale
While the property is for sale, nothing changes. You must maintain your monthly commitments and fund the account. In the same way, the escrow account also works in the ordinary course of settling invoices on their due dates.
The sale of the property does not affect the traditional way of paying taxes and insurance.
Phase Two: Property Taxes
The closing agent has the job of certifying that the property taxes have been paid. If the escrow account paid the taxes after the closing date, you would receive a refund at closing to pay off the overage. But if the bill has not been paid, the seller must do so with the proceeds from the sale. You’ll also credit the new owner for future payments.
Phase Three: Insurance Payments
The escrow account pays the monthly insurance premium in advance, so it should be debt-free at closing. In any case, the insurance company must refund any unused premiums paid.
Phase four: Refund of the credit balance
You will not receive your escrow account refund check at closing. The lender will not close the account until the loan is finalized. If you ask, “when will I get my escrow refund after selling,” the lender will complete the bill when they confirm the transfer, and you will receive the money back in your account. This check takes a couple of weeks to arrive.
How much will my escrow refund be?
To calculate the escrow refund, you should have the monthly escrow amount on hand. Remember that this combines the tax, insurance, and mortgage payment. Since these are annual payments, you must divide this by 12 to get a monthly rate. To the total, add them up, and you have the monthly escrow amount.
The next phase estimates the “cushion” the lender leaves in the account as a reserve, equivalent to two months of prepayments. This amount is multiplied by three to pay off the next month’s debt plus the two months’ cushion. This amount is the total amount the mortgage company can keep in your account.
You compare this number to the current balance in your account. You can request a refund if it is equal to or greater than $50. This process has no limits on refunds. The only limitation is that the total must equal $50.
REFERENCE
- https://www.consumerfinance.gov/ask-cfpb/what-is-an-escrow-or-impound-account-en-140/
- https://www.consumerfinance.gov/consumer-tools/mortgages/answers/key-terms/
- https://www.law.cornell.edu/wex/escrow
- https://www.findlaw.com/state/connecticut-law/connecticut-security-deposit-laws.html