When you are looking to refinance your mortgage, you would like to see all possible options to lower your cash to close.
If you are paying your property taxes and homeowner’s insurance through an escrow account you should consider the option of netting the escrow when you are refinancing your mortgage.
In this post, we will understand what is netting escrows in detail.
Escrow netting is only available on request for individuals who are looking to refinance their current mortgage.
It allows the borrower to credit the balance in the escrow account towards the outstanding mortgage balance at the time of requesting a payoff.
Escrow is money set aside at the beginning of a mortgage (and as part of the monthly payment) to ensure that property taxes or property insurance are always paid on time.
This escrow account helps you to set money aside for paying property taxes and homeowner’s insurance before they are due so that you don’t have to pay it in a lump sum.
When you are refinancing if you request to net your escrow, the lender will send you the payoff after deducting the escrow balance from your existing mortgage balance.
When you refinance, escrow netting will allow you to apply the credit of the balance amount toward repaying your existing mortgage.
In other words, netting escrows help reduce the principal amount for the mortgage that you are going to refinance. Let’s give an example.
John refinances his mortgage with an outstanding balance of $200,000. He has $2,000 in his old escrow account.
He requests for netting his escrow. With the request the lender nets his escrow balance with the current payoff and his new refinance principal amount would be $198,000.
In another example, Jane refinances her mortgage with a balance of $200,000. She decides not to net the escrow.
Her balance in the escrow account is $2,000. In this case, the new refinance principal amount is $200,000 and she would receive a check from the lender for $2,000.
In John’s case, since the new principal amount is lowered by $2,000, this means that the monthly payments that he would be paying would be less than what Jane would be paying considering that both of them get the same interest rate and loan term.
It is important to keep in mind that the netting escrows option is not available for all types of refinances.
FHA does allow the borrowers to net their escrows while refinancing their current FHA loan, however not all the lenders would provide this option.
It is better to check with your lender before you refinance to check if they provide this option.
Anyways, you would have to pay escrow when you refinance; however, escrow netting could help you to lower your monthly payments.
Ensure that you speak to the appropriate department and/or management. Be patient with what you ask for. Typically, the lender will ask you to submit a written application.
Submit the request to the payoff department via the website, email, or fax. Then wait for the correct number of days and call back to follow up!
The request letter must include the following: It should mention that you are requesting to net your escrow balance with your payoff. Ensure that the request includes your name, address, and correct loan number.
After mentioning all the above things, sign the request letter with the date.
Not all lenders accept e-signs. Most of the lenders would require a wet signature for this kind of request.
Even if the e-signs are accepted by some lenders, it may take time to process the request.
When you refinance your current mortgage, you have two options. You can pay the new escrow amount at the closing and receive a check for the escrow balance after the closing, or you can request to net the escrow and apply a credit to the current mortgage balance.
Either way, a new escrow account needs to be set up as part of your monthly mortgage payment once you refinance.
Hence, Escrow netting can lower the principal balance of your new mortgage. Finally, a lower principal helps borrowers save money over the life of the loan.
The downside of netting escrow is that returning the original escrow balance will not result in a refund.
You won’t have access to the escrow funds. Instead, the money is sent to help you with your next mortgage principal.
Netting escrows could be one of the best options to save money on your mortgage refinance in the long run.
However, this option may not be available to every lender. Ensure that you speak to your lender before refinancing to check if this option is available with them.
If you do not request to net your escrow, by default the lender would refund the amount to you after the closing.
With the mortgage rates still quite close to the all-time lows, it might be a good time to refinance your mortgage to save on your monthly payments or take some cash out and get your home renovated.
It is important that you consider all the details and factors carefully before you make a decision on whether you want to refinance or no.
Homeowners refinance for a variety of different reasons. Here are some best reasons to refinance your mortgage.
One of the most popular reasons to refinance among homeowners is to acquire lower interest rates.
Homeowners with high-interest rates can take advantage of the lower rates and also shorten their loan term through a rate-and-term refinance.
The economy right now is in what w call a low-rate environment, making it less expensive to borrow money.
Also, mortgages with shorter terms have typically low-interest rates compared to longer-term mortgages.
A cash-out refinance can be a good option to get some cash and save money in the long run if you have some high-interest debts on personal loans or credit cards.
However, a drawback to cash-out refinance is that you may not be able to deduct from tax the interest you pay if the cash is not used to buy, build, or significantly improve your home.
It is important to understand that you are securing an unsecured debt using your home and thus you have to be careful and make sure you can afford the new terms to minimize the risk of losing your home.
Homeowners often tap into their home equity through a cash-out refinance to get some cash in hand and fund expenses like renovations, repairs to the home, or sometimes even the college or school fee of a child.
Another benefit of a cash-out refinance is that when used to renovate your home, it adds to the value of the home, and the refinance rates are usually lower compared to other loans.
The interest you pay on a cash-out is also deductible from tax.
Another good reason to refinance is to lower your monthly payments, especially if you have private mortgage insurance (PMI) and your loan is insured by the Federal Housing Administration (FHA).
Although FHA loans are a good option for borrowers that do not have much savings or a good credit score, it also has a con to it- obligatory mortgage insurance.
After the payment of an upfront premium of about 1.75% of the loan amount, a majority of FHA borrowers keep paying a mortgage insurance premium of 0.85% annually, for the remaining term.
This FHA loan can be refinanced into a conventional loan if a borrower wants to get rid of the PMI once he/she has acquired 20% equity in the home.
Borrowers can refinance their current mortgage into a new mortgage with a reduced and much shorter term compared to the current mortgage.
This helps the borrowers to pay off the mortgage in a much shorter span of time for instance if you refinance a 30-year mortgage to a 15-year mortgage.
Another good reason to refinance and reduce the term of your mortgage is that mortgages with shorter terms have lower interest rates compared to long-term mortgages.
However, a downside to reducing the mortgage term is that it will affect your monthly payments.
You will basically be paying more as monthly payments due to the simple fact that you have to pay off the loan in a much shorter term.
Alternatively, to reducing the loan term, you can also refinance to increase the loan term.
A longer-term mortgage will have a higher interest rate and thus you will be paying more interest, but at the same time, you also save on the monthly payments as a longer-term mortgage has considerably lower monthly payments.
Not everyone can afford to pay high monthly payments and would rather prefer a longer-term with lower monthly payments.
An Adjustable-Rate Mortgage usually offers a lower interest rate initially, compare to a Fixed-rate mortgage.
However, the periodic adjustments to the interest rate of an ARM can eventually result in a much higher interest rate.
Refinancing from an ARM to a fixed-rate mortgage can help eliminate these adjustments and acquire a lower fixed mortgage rate.
Alternatively, if the interest rates are going down, a borrower may refinance from a fixed-rate mortgage to an ARM to acquire even lower interest rates.
This can also be a good plan for homeowners that do not want to stay in the home for more than a few years.
There are multiple best reasons to refinance your current mortgage loan with a new one.
However, it ultimately depends upon what your particular needs and plans are for the mortgage.
Thus, before your choose a mortgage or before you refinance, you must carefully analyze every little detail and related to the mortgage and then make an informed and well-planned decision.