What Happens to an Outstanding Escrow Balance?
Lenders usually require mortgaged homeowners to place money into escrow accounts, which commonly cover property taxes, homeowner’s insurance and mortgage insurance that the borrower owes. The lender will add the amounts for escrow onto a borrower’s monthly payments and then remit these monies to an escrow company. The escrow company will send monies back to the lender as needed to pay off insurance and taxes, but will also maintain an outstanding escrow balance upon which the borrower may have the right to collect.
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Size
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An escrow company can hold on behalf of a lender up to two extra months worth of estimated escrow payments as a cushion in case the outstanding escrow balance changes from month to month. This can occur when property taxes and insurance costs increase or the homeowner doesn’t make payments on his home loan.
Analysis
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The lender must estimate the costs of escrow items on at least an annual basis in order to ensure that the escrow company withholds the correct amount of money from the homeowner. The lender must also send the borrower a statement every year notifying him of his outstanding balance. Lenders will compare the borrower’s escrow balance to the previous month on a monthly basis to determine whether the borrower has paid too much for taxes and insurance.
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Refund
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If the account contains a surplus of $50 or more compared to the previous month, the lender must refund the money to the borrower, unless the borrower agrees to have the amount kept in his escrow account as a surplus or is behind on his mortgage payments. For surpluses under $50, the lender can choose to refund the overage, or he can apply it to the mortgage payment the following month.
Closure
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If a borrower pays off his home note, the escrow company must refund the existing balance in his account. Federal law sets no time limit on when the escrow company must make the refund. While the Real Estate Settlement Procedures Act requires lenders to refund excess funds, the borrower may have to request that the escrow company refund his outstanding balance. Some states require payments shortly after a borrower has no future escrow obligations, and escrow agreements usually contain the terms of refunds on outstanding balances.
Warning
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If a lender requires the borrower to place excess money into an escrow account, the borrower should make a written request to the lender sent by certified mail to ask for an explanation of escrow charges. The bank must respond to the letter within 20 days and fix the issue within 60 days. A borrower who cannot resolve an issue with his outstanding escrow balances should file a complaint with the U.S. Department of Housing and Urban Development or contact his state attorney general’s office.
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