If you refinance your mortgage, you have to set up a whole new escrow account, assuming you have the lender handle your taxes and insurance. The escrow account you have now just doesn’t transfer over to the new lender. If you are close to the due date of your taxes or insurance, this could mean paying the new lender a big chunk of money to get your escrow account up-to-date.
One way around coughing up a lot of cash at the closing is to ask your lender to ‘net escrow.’ This means that your old lender takes your current escrow account and pays it to the new lender. This eliminates the large amount of cash you have to come up with just to refinance your loan.
Does it make sense to net escrow or should you just pay it yourself?
Do You Have the Cash?
The biggest question you need to ask yourself is if you have the cash available to set up the new escrow. If you are unsure of how much you would need, ask your new lender. They will know the due date of your taxes and insurance and can calculate how much money you’ll need.
If you have the cash and you don’t want the hassle of dealing with your old lender, you may just give the lender the cash at the closing and set up your new escrow. You can then wait for your old lender to refund your escrow overage to you via check.
If you don’t have the cash or you don’t want to part with it, you may want to ask your lender to net escrow. This way the only cash you have to come up with is the cash that is necessary to make up the difference. For example, if the new lender decides that your escrow account needs $2,000, but your old escrow account only has $1,500 available, you would have to come up with the $500 difference.
Do You Need the Escrow?
The other question to ask yourself is if you need the escrow account. We can answer this question for you if you owe more than 80% of the home’s value. At that point, the escrow is required. Most lenders won’t let you waive the escrow requirement unless you owe less than 80% of the home’s value.
If you do owe less than 80%, ask yourself if you can handle the responsibility of paying the taxes and insurance on time each month. Just because you don’t have an escrow account doesn’t mean that the lender doesn’t look to see if you make your payments on time. If you miss your taxes or insurance, your lender will be all over it as defaulting on either payment can put the lender in a bad position.
If you default on your insurance and something happens to your home, the lender could face a serious loss. If the house burnt to the ground and you don’t have insurance, you won’t have money to rebuild the home, which means the lender just lost their collateral on your loan.
If you default on your real estate taxes, the county can take first lien position on the home. If you foreclose on the property, the county gets paid first, leaving the lender with a larger loss than they anticipated. This is why the lender will check up to make sure your payments are made on time.
How Much Will You Need?
Each borrower will need a different amount of money when they refinance and set up an escrow. At a minimum, you’ll likely need 2 months’ worth of your real estate taxes and homeowner’s insurance. Depending on when your taxes and insurance are due, the lender may need to collect more to make sure that they can pay your bills on time.
So should you net escrow? It depends on the situation. If you have the cash and don’t want to worry about waiting for your old lender to cooperate, you can just fund the account yourself. If you don’t want to give up the cash at the closing, you can ask your lender if they will net escrow and make the process easier for you.