If a lender finances your home, he may require you to maintain a mortgage escrow account. Each month, you will pay one-twelfth of your annual property tax and homeowners insurance obligations into the account. When the property's insurance and taxes are due, your lender makes the payments for you. However, after you sell your home to someone else, this account is no longer necessary.
Under the Real Estate Settlement Procedures Act, a lender can require you to maintain a cushion in your escrow account in case your property tax and homeowner's insurance bills increase. However, RESPA limits this cushion to one-sixth of your annual insurance and property tax payments. If your lender requires you to maintain such a cushion, the balance in your escrow account won't ever reach zero unless the lender's calculations were inaccurate, you fail to make your payments or your annual payment obligations change.
Selling Your Home
When you sell your home, the lender must receive payment in full for the balance that remains on your mortgage. After receiving payment in full and releasing his claim on the property's title, the lender no longer makes property tax or homeowners insurance payments on your behalf and he must close the escrow account. If a positive balance remains in the account, the lender will refund the balance to you.
If you sell your home close to the time that your property taxes are due, there may be some confusion regarding who is responsible for sending the payments to the local taxing authorities. Because taxes typically become due one year after they are assessed, you are liable for them even if the buyer will own the house on the due date. If the lender has already cashed out your escrow account, you must make the payments from your own funds.
If there is a shortage, rather than a surplus, in your escrow account when the sale of your home closes, the lender may require you to pay it before he will release his claim on the home's title. Your lender must also refund a surplus escrow balance to you if you pay your loan in full through a refinance.