Let’s talk about how you can do a mini cash-out refinance using your escrow account when you refinance your mortgage. Now, don’t get hung up on the term “mini cash-out”—I came up with that one. 

It’s not an official mortgage term, and if you mention it to your neighbors, they’ll probably look at you funny. There’s no button that says “mini cash-out” in the mortgage world, but it’s a useful strategy to know about.

What we’re going to talk about isn’t a standard cash-out refinance or a home equity loan. This is something different, and it’s about using the money sitting in your escrow account to put a little extra cash back in your pocket when you refinance. But remember, not every loan has an escrow account.

What Exactly Is a Mini Cash-Out?

A mini cash-out is basically just my way of describing how you can use your escrow account to get some of your money back when you refinance. It’s not a real industry term, but it gets the point across. And to be clear, this isn’t a traditional cash-out refinance where you’re pulling equity out of your home. We’re just talking about your escrow account here.

Quick recap of an escrow account:

  • Your mortgage servicer holds part of your monthly mortgage payments in an escrow account.
  • This money is used to cover your property taxes and homeowner’s insurance.
  • The money in the escrow account is yours, and when your mortgage is paid off or refinanced, that money comes back to you.

Note: about 1% of escrow accounts may only collect for taxes and/or insurance. We’re making the assumption that this is a “normal” escrow account where both are being collected. 

How Does an Escrow Account Work?

Let’s take a quick look at how an escrow account works. If you’ve got a mortgage, you’re probably already familiar with this. Every month, a chunk of your mortgage payment goes into this account to cover future property taxes and insurance payments.

Here’s the breakdown:

  • Each month, you pay 1/12th of your annual property taxes and insurance into your escrow account.
  • It’s your money, held by your mortgage servicer to make sure those bills get paid on time.

When you refinance, your old loan gets paid off, and that escrow account? Well, it’s no longer needed. And since it’s your money, you get it back. That’s where the mini cash-out comes in.

How Does a Mini Cash-Out Refinance Work?

Let’s say you’re closing on a refinance in October, and you’ve got about $7,000 sitting in your escrow account that’s been building up over the year. When you refinance, your old mortgage gets paid off, and the mortgage servicer will refund that $7,000 to you. Usually, you’ll get that refund within about 30 days after closing. It could be quicker, it could be longer. It all depends on the mortgage servicer and how quick they are.

So, what’s happening here?

  • You’re getting a refund from your escrow account after your old mortgage is paid off.
  • That refund is money you’ve already set aside for taxes and insurance.

Now, this is why I call it a mini cash-out—because you’re getting some money back. But it’s not necessarily free money because It’s money that’s already earmarked for taxes and insurance.

The Catch: You Still Owe Taxes and Insurance

Here’s the important part: you still owe property taxes and homeowner’s insurance. That $7,000 you’re getting back? That was originally set aside to cover those bills, and those bills are still coming due.

Key points to keep in mind:

If you don’t set up a new escrow account with your refinance, you’re going to need to pay those taxes and insurance out of pocket.

For example, if you close in October, you’ll need to pay those property taxes by January 31st. So, you’ll need to hold onto that $7,000.

Setting Up a New Escrow Account

If you do set up a new escrow account when you refinance, you’ll need to fund it. This usually means writing a check at closing to get the new account going.

Here’s what happens:

  • You’ll need to replenish the new escrow account at closing.
  • In our example, you might need to write a check for $8,000 or $9,000 to cover the taxes and insurance that are about to come due.

Now, this might feel like you’re paying more than you’re getting back. You’re getting a $7,000 refund, but you need to pay $8,000 or more at closing. But remember, that refund was always meant for your taxes and insurance. You’re not losing money; you’re just moving it around.

Rolling the Escrow Amount into Your Loan

If writing a big check at closing doesn’t sound appealing, there’s another option: you can roll the amount needed for the new escrow account into your loan balance.

Here’s what happens:

  • Instead of paying $8,000 or $9,000 at closing, you can roll that amount into your mortgage.
  • The $7,000 refund is still yours to keep, and your taxes and insurance are covered by the new escrow account.

This way, you avoid paying a large amount out of pocket at closing, and your loan balance increases slightly instead. It’s a simple way to manage the funds without stressing about a big check at closing.

Is a Mini Cash-Out Refinance Right for You?

This strategy won’t be for everyone, but it’s a nice way to get a little extra cash back during the refinancing process. Just remember, while you’re getting money refunded, it’s not “free” money. It’s money that’s already been set aside for taxes and insurance.

Consider this strategy if:

  • You have a significant amount in your escrow account and want a refund after closing.
  • You don’t mind rolling escrow costs into your loan balance or paying at closing.
  • You understand that this refund is money you’ll still need to use for future tax and insurance payments.

The Bottom Line

A mini cash-out refinance is a smart way to use the money sitting in your escrow account to get a refund during your refinance. Whether you set up a new escrow account, keep the refund for other expenses, or roll the new escrow amount into your loan balance, the key is understanding that this isn’t free money. It’s simply moving around funds you’ve already saved for taxes and insurance.

To sum it up:

  • A mini cash-out gives you access to your escrow money during a refinance.
  • You’ll need to decide whether to pay out of pocket at closing or roll the new escrow costs into your loan.

Either way, make sure you’ve got enough to cover those taxes and insurance when they come due.

Need Help With a Mini Cash-Out Refinance?

If this sounds a little confusing or you’re not sure if it’s the right move for you, give the Mortgage Mark team a call. We’re here to walk you through the whole process, answer any questions, and help you make the best decision for your financial situation.

And remember, when you think mortgage, think Mark!

mark pfeiffer

Mark Pfeiffer

Branch Manager
Loan Officer, NMLS # 729612
(972) 829-8639
MortgageMark@MortgageMark.com

 

Mark Pfeiffer is a Mortgage Loan Originator with CMG Home Loans and a veteran of the mortgage industry since 2003. Mark is responsible for ensuring all loans originated by the Mortgage Mark Team offer competitive terms and close on-time.

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