So, you received an escrow disbursement check in the mail? If you have contracted a mortgage on your property, you are probably more used to send money from your lender every month than to receive some on their behalf. What does this unexpected return mean, and what should you consider when you receive it?
When you were approved for a mortgage covering 80 percent or more of the value of the property, your lending establishment likely required you to set up an escrow or impound account. In addition to the payment for the mortgage itself, a part of your monthly payments is directed toward this account to cover your homeowner’s insurance premium, property taxes, and other property expenses. It protects the lender from you defaulting on those payments and prevents additional liens that could impede the foreclosure process. The account is usually set up during the closing.
Although it is a lender requirement, the account is held by a third party, and the money it holds remains yours. It can only be released for payment on items you have previously approved. In some cases, there is money left over once the authorized expenses are paid, and the minimum fund requirements are met. If the excess funds are higher than $50, they will be released back to you in the form of an escrow disbursement check at the end of the year. For smaller amounts, the funds will be applied towards future escrow payments.
In which situations may you receive an escrow disbursement check?
There are several cases when you may receive an escrow check. If you have refinanced your property in the past year, the amount of your expenses is likely to have changed as well.
The property’s tax bill may be lower than expected. If the assessed value of the property or the tax rate went down, the amount that you owe might be lower than the lender initially thought.
Your homeowner insurance may also decrease as your equity in the property increases or if you changed insurance company and obtained a lower rate.
Finally, you may have overpaid or double paid for some of the preapproved costs, and the extra payment could have been sent to the servicer.
If you think your escrow account is in excess, you can ask your lender to perform an analysis. Otherwise, most lending establishments will do so once or twice a year. As you are filing taxes, keep in mind that escrow disbursements are not considered income. It is a reimbursement of money you already paid and, therefore, it is not taxable.
Can the lender require the money back?
You may have a pleasant surprise and receive some excess funds from your lender. Unfortunately, you could also be in the situation where the expenses your escrow account should cover have increased. If that is the case, you could be facing an escrow shortage. In order to compensate for this issue, your lender may raise your monthly payments until your escrow account covers the expenses.