Many lenders stash away a portion of a homeowner's monthly payment to meet certain real estate-related obligations. This is called an impound account. In many ways, this is a convenience because you don't have to come up with a big chunk of money when it's time to pay property taxes or when your insurance policy renews. The downside is that this money is not readily available for you to use when you need it. After your home is paid off, and you're officially a homeowner, the status of your escrow account balance depends on what outstanding obligations you have remaining.
What Your Payment Includes
Until your loan is paid off, your monthly mortgage payment includes an amount for property taxes, insurance, principal and interest. The lender holds the amount, collecting a set figure each month with which to pay your taxes and insurance in one or two lump sums per year. When your loan is paid off, there might be a reserve of funds to which you are entitled.
After your home loan is paid off, you are entitled to receive an itemized statement listing all escrow-related transactions that the lender paid out over the life of the loan. The lender may have withheld excess monies for insurance, property taxes or other loan charges. A refund of the escrow balance is generally sent to the customer’s mailing address within 30 to 60 calendar days after payoff.
When you receive your itemized statement, carefully review the statement to find any overage that is due to you. Check the amounts that the lender paid to satisfy your property tax liability, and make sure the due dates were met. Then, call your insurance agent to make sure your homeowner's insurance premium and due dates match what the lender reported. Do the same if you were paying private mortgage insurance. If you note any discrepancy, contact the lender and ask for a refund. The lender must respond to you within 20 days of your inquiry.
You might be surprised to know that the payoff amount on your loan is often higher than the balance due on your monthly statement. That's because interest on your mortgage is paid in arrears. For instance, when you pay your mortgage in January, you are paying for December's interest. So when you pay off your loan, you still might owe another month's interest to the lender. The lender will send you a payoff statement with the amount due to satisfy your debt.
If you pay off your loan early, and are subject to a prepayment penalty, you might consider applying your escrow reserve to the amount due. Most banks prefer to return the escrow balance to the homeowner after the payoff and request a separate payment for the balance. That's because if you deduct the prepayment penalty amount from the final payoff amount, you could owe extra interest if the escrow amount comes up short.