Escrow and home refinancing
February 14, 2020 4:19 AM   Subscribe

I am refinancing my home with the same lender that services my mortgage right now and they're going to apply the money that's in escrow right now (for property taxes) to the payoff of the loan, forcing me to fund a new escrow account at closing. Is this normal?

I am refinancing my mortgage with the same lender who services my loan right now (though they sold the mortgage to Fannie Mae immediately after closing). I got the preliminary disclosure today and noticed that one of the costs is to fund an escrow account with 4 months worth of property taxes (Jan, Feb, March, and a one month buffer).

When I pressed them on this (why can't you just move what's in the escrow account already), they eventually transferred me to some guy who explained it is because they are applying what is in escrow right now to the balance of the loan as part of the payoff. The amount being financed is not decreased by the amount that is in escrow right now so I am confused.

Is this normal? I would expect one of these outcomes:
1. What is in escrow right now is simply used to fund a new escrow account, any shortfall I am responsible for (probably 1 month of property taxes)
2. What is in escrow right now is applied to the payoff of the loan, but then the total amount refinanced should be the payoff balance now less what is in escrow

Am I missing something? I was finding it hard to get anywhere with them on the phone yesterday because the last guy who was explaining this to me was acting as though this is common practice and I was an idiot for not already knowing this was going to happen. I can guarantee this was not mentioned to me during any part of the process until yesterday.
posted by King Bee to Work & Money (7 answers total)
I discussed refinancing a home from primary residence to a rental (and 15yr to 30yr) recently, and my understanding was that I'd have to come up with the escrow funds separately for the new loan and they'd refund the other escrow after some period of time after the refi closed.

So it seems likely to me that they'll actually cut you a check separately some time after the closing. There's probably some reason why they can't just slide the escrow from one loan to another until all the paperwork is done, but I don't know enough about these transactions (nor do I want to do enough of them to learn...) to say what it would be.
posted by jzb at 4:38 AM on February 14

You could ask if you can decline to have an escrow account, and fund your taxes and insurance yourself. I've done this on the last 4 mortgages I've gotten.
posted by rabbitrabbit at 5:56 AM on February 14 [1 favorite]

When you refinance you're technically paying off the first loan. And the terms of that loan typically state that excess escrow money has to be paid back to you personally in 30 days or something like that. It's never refunded to you on the closing date.

The cynical point-of-view is "of course, they can keep that money in their float for 30 days!". The non-cynical view is "well, they're following the terms of the contract and once they know the loan is closed and all paperwork is completed, then they are doing what they are instructed to do". The bank isn't obligated to move your money to the new account, nor do they want to bother since it's usually not the same bank.

I'm with rabbitrabbit, sign the document acknowledging that you are declining escrow and will pay your tax/insurance independently (aka "self-escrow")...unless your rate is dependent on bank escrow. In that case you're going to need to find the cash for the interim period until your refund check arrives. (Just don't do anything funny that will make you fail underwriting. No undocumented personal loans from Aunt Bertha, etc).
posted by JoeZydeco at 6:09 AM on February 14

It probably depends on the bank and the servicer. At the bank where I work, our payoffs automatically deduct any escrow balance from your principal balance, rather than refunding it to you at a later date. So if we’re the same bank that’s doing the refinance, the net effect is that although you’re technically having to fund a new escrow account, the overall amount of money you’re having to bring in at closing is reduced because your loan payoff was less. This is easier and cleaner than simply moving the money to a new escrow account for a few reasons: makes the paperwork trail cleaner for auditors/regulators, no issues if the refinance loan doesn’t close or is delayed, and the amount you need to fund the initial new escrow account may be totally different (depending on taxes and insurance costs for the new property vs the old one). The big disclaimer here is that I work for a portfolio lender, so we retain all of the loans we make instead of selling them for securitization, so that may have something to do with why we can just apply the escrow balance to the payoff instead of refunding it via check later.
posted by skycrashesdown at 7:59 AM on February 14 [1 favorite]

You need to understand this before you refinance.

As part of the closing, there will be a document showing all the money going in and all the money coming out. Where does it start, and where does it end up. There is money in your current escrow account. If it comes out of that escrow account it has to go somewhere. You need to know where that is. If it is going towards paying down principal, then the principal you owe will be reduced accordingly. The facts you've given so far literally do not add up.

Don't proceed until you understand this. It is possible that you are paying more for the refi than you expect because they are applying those funds to a purpose you weren't aware (and that may not be something you want to pay for).
posted by Winnie the Proust at 9:00 AM on February 14 [1 favorite]

Absolutely, Winnie the Proust. Part of the reason I’m asking here is as a sanity check that the facts as they’ve been told to me do not add up.

Thanks skycrashesdown as well for indicating that this is a thing. If the loan payoff is less, shouldn’t the overall amount being financed also be reduced? It should be the payoff amount less what is in escrow.
posted by King Bee at 9:05 AM on February 14

Yes, unless the amount of your closing fees is approximately equivalent to the amount in your escrow account, and they're rolling the closing fees into the loan balance. Then the payoff amount and the new loan amount would be approximately the same -- say they're crediting you $5K for the escrow amount they're refuding, but your closing costs are $5K which brings it back up to the same amount again.
posted by rabbitrabbit at 9:12 AM on February 14

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