What Happens to Leftover Escrow When a Home Loan Is Paid Off?

When you've finally managed to pay off your mortgage, a nice escrow refund can be an added bonus. Your lender maintains an escrow account over the life of your loan. This account uses funds collected with your monthly payment to pay your taxes and homeowners insurance. The money sits in an escrow account until the payments are due. If there is money in escrow when you pay off your loan, the lender will refund what's there.

Escrow Statement

The first thing to do when your mortgage is paid off is to review your escrow statement. You are entitled to a copy of the statement, which lists all of your payments and the subsequent distributions made by the bank. Compare the statements to your own records and tax bills to make sure they match up. If there is any discrepancy, bring it to your lender's attention before a refund is arranged.


The simplest and cleanest way to close an escrow account is to take a refund of the unused funds. Once you've verified that the amount is accurate, the lender will return that money to you. In most cases, it will mail a check to your address on file within a couple of weeks. If you've moved, be sure to forward your new address to the lender to prevent delays in receiving the refund. If you have an account with the bank, it may also allow for a direct deposit into your checking or savings account.


An alternative use of your escrow overage is to include it as part of your mortgage payoff. If your bank allows you to use the money like this, you have to know in advance how much you have left over. If you've gotten a new loan, the new lender will reduce that refinance amount by the escrow overage. The title company will indicate the excess escrow on the settlement statement at closing and your current lender will apply the new funds when it applies the payoff.


When you refinance, there is a good chance your new lender will require its own escrow account. It's important to know that you can't transfer your existing escrow to a new account. You will have to fund the new escrow account at closing out of pocket. Fortunately, you will still get your refund once the old loan is paid off. If you have a negative escrow balance, this amount can be rolled into your new loan amount, provided you have enough equity and can qualify financially for the higher amount.