What Happens to an Escrow Account When a Loan Is Paid Off?

Escrow accounts are separate savings accounts to cover property tax and insurance on a home.

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Back in the 20th century, homeowners might throw a “mortgage-burning” party when their mortgage was finally paid off and the house owned free and clear. In the 21st century, such celebrations have gone out of fashion, but that doesn’t mean today’s homeowners don’t feel a great sense of relief once their mortgage is paid off. When your mortgage loan is paid off, your lender closes the escrow accounts used to pay your property taxes and insurance premiums, and these payments are your responsibility from now on.

Basics of Escrow Accounts

The monthly mortgage bill consists of more than principal and interest payments. When most homeowners take out a mortgage, the lender establishes escrow accounts and adds the cost of the property taxes and the home insurance premiums to the monthly mortgage payment. That is especially true if the borrower put down less than 20 percent of the property’s price as a down payment. The funds for taxes and insurance go into the escrow accounts, and the lender pays these bills for the homeowner from these accounts.

Leftover Money in Escrow

When the final mortgage payment is made, there is generally money left over in the escrow accounts. The lender should provide you with an escrow statement, which you can check to ensure the information matches your own records. If you find an error or have a question, let your lender know before a refund check is issued.

The homeowner should receive these leftover escrow monies in a separate check. However, it is possible to work with the lender prior to making the last payment and apply the funds left in the escrow account to the final payment balance.

Refinance Escrow Refund

When mortgages are refinanced to lower payments or the owner taps into the equity in the home, what happens to the escrow accounts depends on whether you are working with your previous lender or choose a new one. If you’ve found a new lender, they will pay off your old mortgage when refinancing and issue a new one. Usually, that means establishing new escrow accounts, and you can expect a refinance escrow refund.

You should receive your escrow refund within 30 days of your former lender receiving the mortgage payment from your new lender. When refinancing with your current lender, there is generally no change with your escrow accounts.

Property Taxes and Insurance Premiums

Now that your mortgage is paid off, make arrangements with your local property tax collector to have these bills sent directly to you. The same holds true with your homeowners insurance company. You’ll pay property taxes every quarter or annually, depending on state and local law. Your insurance company may bill you monthly, semiannually or annually, depending on their procedures and your preference.

Handle these matters as soon as possible. In a worst-case scenario, failure to pay property taxes can end up with a house going to auction at a sheriff’s sale. At the least, neglecting to pay property taxes promptly means financial penalties and a drop in your credit score. If you don’t notify the insurance company that you are now the dwelling’s sole owner, filing a claim may become a confusing and delayed process.

Budgeting After Mortgage Payoff

Although no longer making a mortgage payment lowers the monthly cost of home ownership, it’s still important to budget for your property tax and insurance payments. The best way to determine what you owe and how much you need to put aside each month is by dividing your annual property taxes and insurance premiums by 12. Add the monthly cost of taxes and premiums together, and that’s your monthly budget number for these purposes.