It's not much fun making your escrow payments each month. After all, these extra dollars do boost the size of your monthly mortgage payment. But at the end of the year, depending on the balance in your escrow account, you might be due a refund. It all depends upon how well your lender was able to estimate your yearly property taxes and homeowners insurance bills.
The odds are high that you fund an escrow account with your monthly mortgage payments. Many lenders require such accounts before they'll loan you mortgage dollars. Under such an arrangement, you'll pay extra with each mortgage payment. Your lender will use these extra dollars to create an escrow account, and will dip into this money to pay your homeowners insurance and property tax bills when they come due.
Ideally, your monthly escrow payment would come out to 1/12th of the money you need to cover your annual property taxes and insurance payments. If you owe $6,000 for these bills, you'd pay an extra $500 with each mortgage payment. However, it's not easy to estimate property taxes and insurance. Both bills can rise or fall; if your property value rises, your property taxes might, too. If you add a second-floor master bedroom to your home, your insurance bill might rise. To cover for this, lenders are allowed to collect an extra two months worth of escrow payments each year. This cushion protects lenders in case your taxes or insurance unexpectedly rise.
If your lender collects too much in escrow, you might have a balance at the end of the year. This happens when lenders overestimate the size of your homeowner insurance or property tax bills. But even if you do have a balance at the end of the year, this doesn't automatically mean that you'll receive a refund.
Each year, your lender is required to perform an escrow analysis, a written report on your escrow account. This analysis, which your lender will send to you, will list any funds you had left in your escrow account at the end of the year. If your account has $50 or more at the end of the year, your lender will refund the money to you. If the amount in the account is less than this, your lender is not required to provide you a refund. Instead, your lender will apply the money to next year's property taxes and insurance.
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