Table of Contents
- What Are Netting Escrows & How Does It Work?: The Best Guide - January 2, 2024
- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
About Netting Escrows
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.
What Are Netting Escrows?
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.
How Does Netting Escrows Work?
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.
How To Request For Netting Escrows With The Lenders?
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.
The Pros And Cons Of Netting Escrows?
The Pros:
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 Cons:
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.
Conclusion
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.
