Refinancing your mortgage loan can save you a significant amount of money each month. But refinancing isn't free. You'll have to pay for closing costs, which can run from 3 percent to 6 percent of your outstanding loan balance. You might also need to either bring enough cash to the closing table to fund an escrow account – depending upon when your property tax bill is due – or roll the costs of creating an escrow account into your monthly payments, something that will make those payments larger. Your lender will use the money in your escrow account to pay for your property taxes and homeowners insurance throughout the year.
TL;DR (Too Long; Didn't Read)
Different lenders have different rules depending on the loan size and property type but, generally, you'll be asked to pay two months' worth of property taxes and homeowners' insurance premiums into the escrow account at closing.
Mortgage Escrow Fund Rules
Many home buyers – when applying for a mortgage loan – allow their lenders to create an escrow account. Lenders use the funds in the account to pay borrowers' property tax and homeowners insurance bills. This way, homeowners don't have to worry about saving up for these payments; the dollars to continually fund an escrow account each year – because homeowners pay property taxes and homeowners insurance every year – are included in homeowners' monthly payments. This way, the escrow account never runs out. And lenders are always able to make property tax and homeowners insurance payments on behalf of their borrowers.
Bringing Escrow Cash to the Table
There are times when during a refinance you will have to provide at least some money to fund your new escrow account. This happens when your first property tax payment is due shortly after your refinance closes. In such a case, you'll need to provide cash to help fund escrow because your lender – if you are refinancing with a new lender – won't have enough money built up due to the fact that you haven't made enough monthly payments.
How Much Escrow Do You Need?
How much you'll need to place in escrow varies depending on your home and where you live. By law, the lender can collect an amount to cover your annual property taxes and your annual homeowners insurance premiums plus two months. The lender will not collect this money all at once, however. Usually, the annual amount and the two-month buffer gets divided by twelve and that sum is added to your monthly mortgage payment, so you're spreading the cost over the full year. The escrow may be front-loaded at closing, meaning you'll be asked to put the first two months' worth of payment in the escrow account before you close the refinance.
Mind the Escrow Gap
When you refinance with a different lender, your previous lender will close down your escrow account once the loan is officially paid off by your new lender. There is a challenge here, though: It can take up to 45 days for your former mortgage lender to send the balance of your previous escrow account to you. This means that you must come up with additional dollars to fund your new escrow account before receiving the money from your old account.
Don Rafner has been writing professionally since 1992, with work published in "The Washington Post," "Chicago Tribune," "Phoenix Magazine" and several trade magazines. He is also the managing editor of "Midwest Real Estate News." He specializes in writing about mortgage lending, personal finance, business and real-estate topics. He holds a Bachelor of Arts in journalism from the University of Illinois.