Can an Escrow Balance Apply on Mortgage Payoff?

by Amanda McMullen

    When you refinance your loan or pay off your mortgage, the lender must close your escrow account. If you request that the balance of your escrow account apply to your mortgage payoff, some lenders will honor your wishes. However, banks typically prefer to return the balance of the account to the borrowers.

    About Escrow Accounts

    An escrow account is an account your lender establishes to hold funds that he uses to pay your property taxes and homeowner's insurance. Each month, the lender deposits a portion of your mortgage payment into the account based on these costs. Most lenders also require you to maintain a cushion in the account, which means that there can be a surplus when you pay off the loan, even if the lender already paid your taxes for the year.

    RESPA

    The Real Estate Settlement Procedures Act requires lenders to abide by certain guidelines when they maintain escrow accounts for borrowers. Under RESPA, lenders cannot maintain a cushion that exceeds two times a monthly escrow payment. When the escrow account's balance is more than $50 over its limit under RESPA, the lender must return the excess amount to the borrower within 30 days of its discovery.

    Bank Policy

    RESPA's statutes don't expressly prohibit lenders from applying escrow balances to mortgage payoffs. However, because applying the balance to the payoff can cause problems, some banks prefer to return it to the borrower instead. For example, if a borrower incorrectly estimates the escrow account's balance and reduces the amount he pays toward the mortgage balance, the payoff may be incomplete and interest will continue to accrue.

    Considerations

    After you pay off your loan, the lender must close your escrow account, regardless of whether the balance is applied to the payoff. If you still own the home that secured the loan but you no longer have a mortgage, remember that you must make your own home insurance and property tax payments during the year. If you refinanced your home, your lender will open a new escrow account and begin making the payments for you.

    About the Author

    Amanda McMullen is a freelancer who has been writing professionally since 2010. She holds a bachelor's degree in mathematics and statistics and a second bachelor's degree in integrated mathematics education.

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