You're refinancing your home mortgage and the new lender wants you to cough up several thousand dollars to start a new escrow account.
But you already have a lot of money tied up in escrow: Can't the old lender just transfer the account to the new one?
Sure, but that doesn't mean the lender will.
Different lenders have different policies on refunding escrow accounts when a loan is paid off. How your lender handles it can have a big effect on your cash flow, especially if you need a large escrow account to cover property taxes and homeowner's insurance.
Some lenders are willing to transfer the escrow money to the new lender at settlement. Others apply the money to your mortgage balance. That reduces the payoff needed, and leaves money from your new loan to set up a new escrow account.
But some lenders keep the money for weeks before returning it to the borrower. While the lender is collecting interest on your escrow money, you may have to borrow money to set up an
account with your new lender.
"Some places will hold on to your escrow money for 30 days," said Steven J. Kosyla, president of Clover Federal Savings & Loan in Pennsauken, N.J.
He said he doesn't approve of such practices, and Clover's policy is to apply the escrow money to paying off the loan, so that the new mortgage can be for a lower amount.
Gary Gordon, vice president of Main Line Federal Savings Bank in Villanova, Pa., said the practice of holding on to the escrow money is becoming "more prevalent." His bank also returns the money at settlement.
Hanging on to escrow money is illegal in some states, but not in Maryland, according to Louis Reinhardt, the state's assistant commissioner of consumer credit.
As a matter of practice, some Maryland lenders don't refund escrow funds until a refinanced loan has gone to settlement, Mr. Reinhardt said.
How much money is tied up in escrow varies with the time of year. Some people who closed on a loan in January, for instance, found that the money required to set up escrow was unusually large, Mr. Gordon said.
For instance, Pennsylvania county and township tax payments fall due at the end of February, so people who closed on a loan in January had to come up with 13 months' worth of those taxes. Twelve months' worth went to the annual payment, and one month's worth went to the escrow account to help with next year's payment -- because the first monthly payment on the new loan would not be due until March 1.
Some borrowers are choosing to avoid escrow accounts and to pay property taxes and homeowner's insurance directly.
Lenders that allow "self-escrow" typically require borrowers to have a lot of equity in the property.
In other words, your mortgage loan can't be for more than, say, 60 percent to 80 percent of the value of your home, depending on your lender's policies.
Even then, some lenders will increase the mortgage interest rate or charge fees for allowing you to pay property taxes and homeowner's insurance directly.
Choosing to self-escrow can require a borrower to make substantial payments a few times a year, and many prefer to make smaller, stable payments each month into an escrow account.