Why Did I Get an Escrow Refund Check?

Receiving an escrow refund check from your mortgage servicer means they collected more funds than necessary for your property-related expenses. Understanding why these refunds occur and what they mean for your financial situation can help you manage your homeownership costs more effectively. This article clarifies how escrow accounts work and the common reasons for receiving a refund.

How Escrow Accounts Work

A mortgage escrow account functions as a savings account managed by your loan servicer, designed to cover specific home-related expenses. Each month, a portion of your mortgage payment is allocated to this account. These funds are held to pay for recurring costs like property taxes and homeowner’s insurance premiums. The servicer estimates the annual cost of these items and divides that amount by twelve, adding it to your regular principal and interest payment.

The primary purpose of an escrow account is to ensure these significant expenses are paid on time. This arrangement helps homeowners avoid large, infrequent bills by spreading the cost throughout the year. Your mortgage servicer is responsible for disbursing these funds to the appropriate entities when taxes and insurance premiums become due.

Common Reasons for an Escrow Refund

An escrow refund check indicates an “escrow surplus,” meaning the amount of money collected in your account exceeded the actual expenses paid for taxes and insurance. Mortgage servicers are required to conduct an annual analysis of your escrow account. If this review reveals an overage, a refund may be issued. If the surplus is $50 or more, the servicer must return the excess funds to you.

One frequent reason for a surplus is a decrease in property taxes, such as when your home’s assessed value is reduced or local tax rates decline. Similarly, a decrease in homeowner’s insurance premiums can lead to an excess balance, perhaps if you shopped for a more competitive policy, received a discount, or if the overall cost of coverage for your area decreased.

Sometimes, the lender’s initial estimation for taxes and insurance at closing was higher than the actual costs. One-time adjustments or credits, such as a property tax rebate, can also contribute to a surplus. If you recently refinanced your mortgage, the old escrow account is closed, and any remaining funds are refunded from the previous servicer.

Understanding Your Annual Escrow Analysis

Mortgage servicers are required by federal law to perform an annual escrow account analysis. This analysis compares the total amount collected with the actual disbursements made for property taxes and insurance over the past year. The statement you receive details these transactions, shows the projected costs for the upcoming year, and indicates whether there is a surplus, a shortage, or a balanced cushion in your account.

This statement helps understand why you received a refund and what your new monthly escrow payment will be. It outlines the specific changes in your property taxes or insurance premiums that led to the surplus. Reviewing this document allows you to verify the calculations and anticipate future adjustments to your mortgage payment.

What to Do After Receiving a Refund Check

Deposit the funds, as this money represents an over-collection from your payments. An escrow refund check is not considered taxable income by the Internal Revenue Service (IRS), as it is a return of your own money that was overpaid, not a gain or new income.

After depositing the check, review the accompanying annual escrow analysis statement. This statement explains the reason for the refund and details your new monthly mortgage payment. Compare this new payment amount with your previous one and adjust your budget. Understanding the underlying changes ensures you are prepared for future mortgage payment adjustments.