To protect their interest in your home, most mortgage lenders will require you to open and maintain an escrow account. Lenders determine how much money you must pay into this account each month based on the amount of your annual property tax liability and homeowners insurance premiums. If this balance becomes too high, however, lenders must issue a refund.
RESPA Escrow Account Regulations
To ensure that lenders treat borrowers with escrow accounts fairly, Congress passed the Real Estate Settlement Procedures Act (RESPA), which regulates the management of all mortgage escrow accounts. Under RESPA, lenders must calculate a borrower's monthly escrow payment as 1/12 of the borrower's estimated property tax and homeowners insurance obligations for the year. RESPA also allows lenders to keep a cushion in the account equal to no more than two months' escrow payments.
Yearly Escrow Analysis
To ensure that the cushion in your escrow account isn't ever too large, RESPA requires lenders to perform an analysis of your escrow account at least once each year. During this analysis, the lender projects the balance of the account for 12 months into the future. If the lender expects the account's balance to be greater than two months' escrow payments at its lowest point, the balance is higher than RESPA allows.
Surplus Threshold for a Refund
If the lender determines that the balance in your account it too high, he must rectify the problem. If the surplus is less than $50, RESPA allows the lender to apply the amount to future escrow payments, which will lower the amount you must pay into the account each month. If the surplus is greater than $50, RESPA requires the lender to return it to you within 30 days of the analysis.
Escrow Balance After Loan Payoff
Lenders must also return any excess escrow money to you after you pay off your loan. Though some lenders may allow you to apply these funds to the balance of your loan, most prefer to mail them to you after the account is closed.
Some States Pay Escrow Interest
The U.S. Department of Housing and Urban Development (HUD) doesn't mandate that a lender must pay interest to its customers on the money it holds in their escrow accounts. However, at the state level, some states do require lenders to pay this interest, even though there are some legal exceptions. In these states, your escrow surplus will be returned with interest.
Resolving Escrow Shortage
During escrow analysis, lenders sometimes find that your account balance is lower than it should be. In such cases, lenders can require you to make larger escrow payments until the shortage is resolved.