If you’re considering refinancing your home, you might have heard the term "netting your escrow account." It’s an important concept that can save you time and money. But what does it mean, and why should you care? Let’s break it down and explore the benefits of netting your escrow account with your current lender during a refinance.
What Is Netting an Escrow Account?
When you have a mortgage, your lender often manages an escrow account for you. This account is used to pay things like property taxes and homeowners insurance. Each month, part of your mortgage payment goes into this account, and when taxes or insurance are due, the lender pays them on your behalf.
When you refinance, you might have the option to net your existing escrow account. In simple terms, this means your lender will apply the remaining balance in your escrow account toward your loan payoff rather than refunding the balance to you after closing. Here is how choosing to net your escrow compares to choosing not to net escrow and receive a refund after closing:
- Refund After Closing:
- Your existing escrow account is closed.
- The lender sends you a refund of the remaining escrow balance after the refinance is complete. It might take a few weeks to receive your check in the mail.
- You need to fund a new escrow account for the new loan, which may require additional cash at closing. You will have to bring cash at closing to pay your closing costs and to fund your new escrow account while you wait for your escrow refund check to arrive from your old escrow account.
- Escrow Netting:
- Your existing escrow balance is applied directly to reduce the payoff amount of your old loan.
- Keeping your new loan amount about the same, this can lower the amount you need to bring to closing because the netted escrow funds can be applied to funding your new escrow account or to pay for other closing costs. Or. You could still bring cash to close, and have a lower loan amount, slightly reducing your monthly payment and lowering the total interest you will pay over the life of the loan.
- In either case, no need to wait for a check in the mail with your escrow refund from the loan you refinanced since the funds have been already applied to your new loan transaction.
In Short: The Benefits of Netting Your Escrow Account
1. Reduce the Cash Needed at Closing or Lower Your New Loan Amount
Refinancing your home can come with closing costs. These can include things like appraisal fees, title insurance, and other costs associated with processing the new loan. When you choose to net your escrow account, the balance in that account is applied directly to your loan payoff reducing the total amount you owe or to reduce the cash you need to close by using the money to pay closing costs or fund your new escrow account. You can choose to lower your new loan amount or reduce the amount cash you need to bring to the closing table, making the process more affordable upfront.
2. Simplifies the Process
Netting your escrow balance can make the entire refinancing process smoother and simpler. Instead of waiting for a refund from your current lender after the refinance is complete, you can have those funds immediately available to reduce your new loan balance or apply to closing costs or funding your new escrow. This eliminates the waiting period and the hassle of receiving and managing the refund yourself.
3. Helps You Maximize Your Available Funds
When you’re refinancing, especially if you’re trying to lower your monthly payment or total interest paid, every dollar counts. By applying your escrow balance directly to your loan payoff, you maximize the funds available for the transaction. This could mean less financial juggling during the refinance process and more flexibility with your money.
4. Avoids Delays in Reapplying Funds
When you receive a refund of your escrow account balance after closing, there’s typically a delay of several weeks before you get that money back. Netting the escrow account cuts out this delay. Instead of waiting, those funds can be put to work right away. This can be especially helpful if you’re trying to refinance quickly or if timing is important in your financial planning.
Why It Matters for You
If you're refinancing to take advantage of better rates or to change the terms of your mortgage, netting your escrow account can be a smart move. It simplifies the process, saves you from waiting for refunds, and reduces your new loan amount or the amount of cash you need to bring to the table. In short, it’s a straightforward way to make the refinance process more efficient and less stressful. By netting your escrow, you can enjoy a smoother refinance experience and take advantage of the savings or convenience that come with it.
Final Thoughts
Refinancing can be a great opportunity to lower your mortgage rate, reduce your loan term, or free up cash for other expenses. And while there are many aspects to consider during the process, netting your escrow account is a small but powerful step that can make a big difference. Talk to your loan officer about whether netting your escrow is right for you.
