What Is an Escrow Overage Check & Why You Got One
Learn why you received an escrow overage check – a refund of excess mortgage funds – and how to process it correctly.
An escrow overage check represents a refund for excess funds held within an escrow account. It is issued when more money has been collected than was necessary to cover property-related expenses. These checks signify a return of a homeowner’s own money.
Understanding Escrow Accounts
An escrow account serves as a dedicated fund managed by your mortgage lender or servicer to cover certain property-related expenses on your behalf. These accounts are primarily used to collect and disburse funds for property taxes and homeowners insurance premiums. Instead of homeowners paying large annual or semi-annual bills directly, a portion of their monthly mortgage payment is allocated to this account.
The mortgage servicer collects these funds monthly and holds them until the property tax and insurance bills are due. This system simplifies financial management for homeowners by breaking down large expenses into smaller, more manageable monthly installments. Lenders often require escrow accounts to ensure these significant bills are paid on time, thereby reducing the risk of penalties or lapses in coverage that could jeopardize their investment in the property.
Each year, your lender performs an escrow analysis to review the account’s activity from the previous 12 months and project expenses for the upcoming year. This analysis determines if the collected amounts are sufficient, or if there is a shortage or a surplus. The goal is to maintain enough funds to cover anticipated expenses, often including a cushion, typically equal to two months of payments, to guard against unforeseen increases.
Common Causes of Escrow Overage
An escrow overage occurs when the funds collected in your escrow account exceed the amount needed to cover your property taxes and homeowners insurance. This surplus typically arises from several common scenarios. One frequent reason is a decrease in property taxes, which can happen due to a reassessment of your property’s value or the application of new exemptions, such as a homestead exemption. If your property tax bill drops, but your monthly escrow payments continue at the previous, higher rate, an excess balance will accumulate.
Similarly, a reduction in homeowners insurance premiums can lead to an overage, such as when you secure a lower rate or discounts. When the actual insurance cost is lower than the amount estimated and collected, the difference contributes to a surplus. Errors in the initial calculation of escrow payments or subsequent lender adjustments can also result in an overpayment.
Another significant cause for an escrow overage is the closure of the mortgage loan itself, which can happen through a full payoff or refinancing with a new lender. When a mortgage is paid off, the escrow account associated with that loan is closed, and any remaining balance is returned to the homeowner. If you refinance with a different lender, your old escrow account is closed, and a new one is established, leading to a refund of the surplus from the previous account.
Processing an Escrow Overage Check
Upon receiving an escrow overage check, verify its legitimacy by confirming the issuer, typically your mortgage servicer, and cross-referencing the amount with your most recent annual escrow analysis statement. If this analysis reveals a surplus of $50 or more, the lender is obligated to refund that amount to you.
Refund checks are typically issued within 30 days of the escrow analysis identifying the overage. If your mortgage loan has been paid off or refinanced, the refund of the remaining escrow balance is generally issued within 20 to 30 days of the account closure. Once verified, you can deposit or cash the check through standard banking procedures.
An escrow overage check is generally not considered taxable income. This is because it represents a refund of your own money, initially paid into the account to cover expenses like property taxes and insurance premiums. For specific tax advice, consult a qualified tax professional. If you do not receive an expected overage check or if it is lost, contact your mortgage servicer directly to inquire about its status or request a reissuance.