Here's What Happens When Your Escrow Account Has Too Much Money in It

If you have a mortgage loan, your monthly payments to your lender may include more than just payments of your principal and interest on your home loan. You may also be required to pay into an escrow account.

Many mortgage lenders require you to pay money into escrow each month to cover your property taxes and your homeowners insurance bill. These bills typically come due once per year, but mortgage lenders want to be sure you have the money to pay them. So, they'll divide the amount due by 12, add the required amount onto your mortgage payment, and you'll pay it as part of your monthly mortgage bill.

The money you pay as part of your mortgage that is intended for property taxes and homeowners insurance premiums will then be put into a special escrow account. This is a secure account where your money is held until it is needed to cover the tax and insurance bills when they come due. Your lender then pays those bills out of escrow.

Why would you have too much money in escrow?

Typically, you will end up with too much money in your escrow account if something changes, like your property taxes decrease or your homeowner's insurance premiums go down. If you had been paying $300 a month into your escrow account to cover property taxes totaling $3,600 per year and your property taxes were lowered to $3,400 per year, you could become entitled to an escrow refund for that excess amount. Your lender would owe you $200 that you overpaid into escrow.

But what happens if your escrow account has too much money it? The answer depends on your situation.

You may be entitled to an escrow refund -- or the money may be applied to next year's escrow payments

If you end up with too much money in your escrow account, you may be able to request an escrow refund, or a lender may send you an escrow refund automatically. If you request a refund or are entitled to one automatically, this will usually come in the form of a check from your lender.

When your lender collects payments to put into escrow, it will do an escrow account analysis at some point during the year. If the lender discovers you have overpaid into the account, this is when an automatic refund could be issued or when you may become entitled to request a refund check. However, some lenders do require that you have a certain amount of surplus funds in the account before they'll issue a refund, such as a minimum of $50.

In some case, mortgage lenders may also default to applying the overpayment to next year's escrow. This would mean instead of getting your $200 back in the above example, you would just pay $200 less into your escrow account next year toward your taxes and insurance.

If your lender allows you a choice, it's up to you whether you receive a check or the extra money in your escrow account just allows you to pay less the next year. If you have this option, think carefully about whether you'd rather get a lump sum back that you can use as you wish or would rather have slightly lower mortgage payments for the upcoming year. This way, you can make the right financial choice for your needs