What Happens to Your Escrow When You Sell Your House?

The Purpose of Your Escrow Account

A mortgage escrow account serves as a dedicated holding place for funds collected by your lender to cover specific property-related expenses. These typically include property taxes and homeowner’s insurance premiums. The lender collects a portion of these anticipated costs with each monthly mortgage payment.

The primary reason lenders require an escrow account is to safeguard their investment in your property. By ensuring that property taxes and insurance premiums are paid on time, they mitigate the risk of tax liens or uninsured losses that could jeopardize their collateral.

The funds accumulated in your escrow account are specifically earmarked for these payments and are not directly applied to your loan principal or interest. This account is intrinsically linked to your mortgage loan, meaning its status and management change significantly once the mortgage is fully paid off, which commonly occurs during a home sale.

Escrow Reconciliation at Closing

When you sell your home, the existing escrow account associated with your mortgage undergoes a reconciliation process during the closing. This involves accounting for the funds held in the escrow account as part of the final financial settlement.

Property taxes, and sometimes homeowner’s insurance premiums, are prorated between the buyer and seller up to the precise date of closing. For example, if property taxes were prepaid for a period extending beyond the closing date, the seller typically receives a credit for the unused portion of those taxes on the settlement statement. Conversely, if taxes are due but not yet paid for the current period, the seller may be charged for their share up to the closing date. These adjustments ensure that each party pays their equitable share of property-related expenses.

The closing agent, often a title company or an attorney, manages these calculations and incorporates them into the closing disclosure or settlement statement. This document provides a comprehensive breakdown of all financial transactions related to the sale. The closing agent also facilitates the payoff of the seller’s existing mortgage, which terminates the active role of the escrow account with that specific lender.

Receiving Your Escrow Refund

After your home sale closes and your mortgage has been paid off, your former mortgage lender will conduct a final audit of your escrow account. This audit determines if there is any surplus balance remaining in the account after all outstanding property tax and insurance obligations are settled. The lender is legally obligated to return any excess funds to you.

Your escrow refund is typically mailed as a check to your last known address, usually arriving within 30 to 45 days following the closing date. It is advisable to ensure your forwarding address is updated with the lender if you have moved.

If you do not receive your refund within the expected timeframe, contacting your former mortgage servicer directly. They can provide an update on the status of the audit and the refund issuance. If an escrow account had a deficit at payoff, the lender adds that amount to the total payoff figure required at closing, settling any shortfall immediately.