You received a refund check from your mortgage lender because you had surplus funds in your escrow account at the end of the year. Now you wonder what you should do with these funds. The good news is there's no one "best" use for this money. It depends on your financial situation.
TL;DR (Too Long; Didn't Read)
You can utilize funds form an escrow surplus in a variety of meaningful ways, ranging from paying down credit card debt to investing.
Defining an Escrow Account
Most mortgage lenders require that a borrower create an escrow account. In such an arrangement, you pay extra money with each of your monthly mortgage checks, and your lender takes these extra dollars and deposits them in an escrow account. When your property taxes and homeowners insurance bills come due, your lender uses the money in your escrow account to pay these bills on your behalf.
You might overpay throughout the year, though. Under federal law, your lender is required to provide a refund at the beginning of the year for any surplus escrow funds over $50. For amounts under $50, the lender has the options of issuing a refund or applying the surplus against the next year's escrow payments.
Sends Funds Back to Your Lender
If you're worried your property tax or homeowners insurance bills might rise -- maybe you've added a new second-floor addition that would boost your homeowners insurance premiums, or maybe property values in your community have soared, something that could cause your property taxes to rise -- you can deposit your refund check in your checking account and send the funds back to your lender, making it clear that you want the money deposited back in your escrow account.
Many lenders provide an option on their monthly bills giving homeowners the chance to specify whether any extra money they are sending should be applied toward their principal balance or escrow account. Make sure you specify that you want your extra dollars to go toward escrow. If your lender doesn't provide this option, call your lender to ask how you can contribute extra escrow dollars with your next mortgage payment.
Credit Cards and Debt
If you are saddled with a high amount of credit-card debt, you could use your refund check to pay off some of it. Credit-card debt comes with high-interest rates, which means paying it down as quickly as possible is your smartest financial move. An escrow surplus refund can help you accomplish this.
Investing Your Escrow Surplus
If you'd rather see your escrow surplus check grow, you can invest it in stocks, bonds or certificates of deposit. Though a loss is possible, these savings vehicles generally yield higher rates of return than do traditional savings accounts.
Boost Your Retirement Income
If you are nearing retirement age, you could use your surplus check to provide a small boost to your retirement savings. You can invest these funds in a traditional or Roth IRA if you haven't yet reached your maximum contribution for the year.
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.