What Does It Mean to Net Escrow?
First off, if you’re unfamiliar with the base concept, escrow is your money that’s put aside at the start of a mortgage by a third party to cover pop up expenses like property taxes, or insurance premiums. It’s a helpful way to have these expenses covered ahead of time by cash you put aside, so you don’t have to juggle them with your mortgage payment and other bills.
Netting an escrow only happens if you decide to refinance your home loan, and it allows you to take the money in your existing escrow account and apply the balance as a credit toward the payoff of the new loan.
Do I Have to Net My Escrow?
It really doesn’t make sense not to; netting your escrow makes the process quicker and easier for both parties involved. When you refinance, you have two options with your old escrow account: you can pay the new escrow amount out of pocket and receive a check for the old escrow account after the payoff, or you can net (or apply) the escrow and use your old account funds to cover the difference for your new escrow. The new escrow in your refinanced mortgage is going to be a part of mortgage costs either way, so if you don’t have the cash at hand to cover it at that moment, netting your escrow is extremely helpful.
Why Don’t People Net Escrows?
A point of confusion for some clients comes when comparing their existing home loan and the new one, which may have different terms. For example, your refinanced escrow amount could very well be more than the one on your existing loan; if your old escrow account was for $2,000 and the refinanced escrow was $3,500, you’d need to bring $1,500 to closing if you don’t want that added to your refinanced loan. Also, if you decide to net your escrow, the discount will not occur until the payoff is ordered, so it’s usually the last thing to happen when refinancing. This can startle some people because when it’s last to occur, a reimbursement check seems much more appealing in a short-term sense. This chart uses the hypothetical example of having a principal balance of $100,000, a refinanced escrow of $3,500, and an “old” escrow of $2,000.
Is There Anything Else I Should Know?
Netting escrow may not apply to all loan types. The Federal Housing Administration (FHA) allows FHA loans to net escrow when refinancing, but not all mortgage companies do, (Quicken Loans does not), so make sure you check with your mortgage provider to see if you qualify for this. When it comes down to it, you’re going to have to pay for escrow when you refinance, and it’s a better deal to net it.
See? That wasn’t so bad. You’ve been pulled up from the world of obliviousness and left with a solid understanding of a complex topic. A big thanks goes to Marshall O’Keefe, a director of mortgage banking at Quicken Loans, for providing insight on the topic so we could bring it to you all. If you have any lingering questions on the topic, please, comment below.
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