Escrow Refund on an Arizona Refinance

AZ Escrow Account Refund

A key factor in determining whether or not it pays to refinance your Phoenix mortgage is to consider what the total costs associated with the refi are (closing costs).  There are 3 main categories of closing costs or better yet settlement charges to consider when refinancing your AZ home loan (I’ll explain why settlement charges is a more accurate term later).

Cost Categories:

1. Lender Fees/Appraisal Fee
2. Title Fees
3. Pre-Paid Taxes and Insurance (aka – “escrows” or “impounds”)

I want to focus on the 3rd category in this post and help you understand why NOT to include this in your cost calculation.  What are pre-paid taxes and insurance or escrows/impounds for?  Before we jump into that, lets talk about your current escrow account.  If you have a mortgage now, chances are you have an escrow account.  An escrow account is essentially a “side” account where your tax and insurance funds are held until the County asks for  your tax payment (in Arizona-Maricopa County taxes are due in April and October) and your insurance company requires a premium payment (this happens once per year).

The funds that are in your escrow account come from you making your monthly mortgage payment.  If you have an escrow account, you also make a partial tax and insurance payment each month along with your mortgage payment.  In other words, your total monthly payment is made up of your mortgage payment + your monthly property tax payment + your monthly homeowner’s insurance payment.  The tax and insurance portions of your total mortgage payment are separated out when your current lender/servicer receives your payment.  These funds are then stored in your escrow account.   This way there is enough money in the escrow account to cover both your insurance and tax bills when they are due.   These bills are paid out of your escrow account on your behalf.  You do not need to make these payment on your own.

What Happens to An Escrow Account When You Refi?

Short answer – it goes away/it gets closed.  When you refinance your Arizona mortgage the escrow account that was associated with your old “to be refinanced” mortgage must be closed.  The money that is in that escrow account at the time the loan is paid off is refunded directly back to you within a few weeks (typically 2 to 4 weeks) after closing on your new refinance.   Great!  More money for you right?  Technically yes it is money to you.  Ever hear the saying “no such thing as a free lunch?”  That definitely applies to this situation.  You see, the money that was in your escrow account that is refunded to you has to be replaced!  If it is not, there would be a shortage in your escrow account when the tax man or the insurance man ask for the money that is owed to them.

For example, lets say that you have accumulated $1500 in your escrow account at the time you refinanced.  These accumulated funds are from the partial tax and insurance payments that are included in each total mortgage payment you have made.  If that money that was refunded to you out of your old escrow after a refinance and was NOT replaced, your new escrow account would not have enough money in it when your property tax and insurance bills become due.  You would be $1500 short!  Your escrow account must be refilled after a refinance.

How is an Escrow Account Re-Filled After A Refi?

The AZ Mortgage Lender helping you with your home loan refinance will add charges to your loan to account for the taxes and insurance funds needing to be replaced.   The amount that your lender charges will be roughly equal to the amount that was in your escrow account before the refinance.  Beware, the amount of your escrow refund and the amount of the new tax and insurance charges will not be exactly equal.  They will be relatively similar.

At the end of the day, the new tax and insurance charges will essentially be a “wash” with the escrow account refund that you will receive.  This is why the new tax and insurance charges (aka – pre-paid taxes and insurance) associated with your refinance should not be considered “costs” and why the term “settlement charges” is more applicable.  You also do not want to consider these as costs when calculating your “break even” point with your refi.  Your break even point is the amount of time it takes for the savings from your refinance to meet and then exceed the costs associated with your AZ refinance.  For example, if your refinance saves you $150 per month and the costs to do the refinance were $2,100 your  “break even point'” would be 14 months ($2100/$150 = 14 months).

Please let me know if you have any questions about how an escrow account works on a refi (FHA, VA, Conventional or USDA).

By Jeremy House
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