Prepaids and Escrows For Refinances
There is a difference between fees paid for closing (i.e. Closing Costs) and Prepaids paid at closing. Fees paid are the cost to do the loan; prepaids are items you’re paying regardless of whether you refinance or not. FYI, the costs of prepaids paid at closing can be thousands of dollars. See How To Pay For Closing Costs for various ways to pay for these.
If you do not have an escrow account AND will be waiving escrows on your refinance you can skip to the last section titled “Insurance May Be Collected”. The sections below are applicable to those that are refinancing and either have an existing escrow account and/or will be getting an escrow account.
If you currently have an escrow account you can expect a refund from your current mortgage provider for the amount they currently hold in escrow once the new loan has closed and funded. An escrow account is like a piggy bank with your name on it and any unused money is refunded to you once a mortgage is paid off. The refund typically occurs within 30 days of the mortgage servicer being paid off and they will send a check to your home address.
If you currently have an escrow account AND you’re getting an escrow account on the refinance loan, this section is applicable to you. If you do a 90-day “zoom out” there is a net-zero impact on your cash flow; in other words, there is nothing extra out of pocket regarding your escrows whether you do or don’t refinance. That said, when you “zoom in” for a 30-day review, it feels like you’re spending money to close because of the new escrow account.
The reason why you’ll be paying more at closing for the new escrow account is because you will need to cover the amount held in your current escrow account PLUS cover the costs until your first payment. Because you’ll be skipping 4 to 8 weeks of a mortgage payment when you refinance (see Payoffs and Payments), the new escrow account needs to account for the amount that would have been covered during the upcoming weeks of non-payment which typically equates to 1 to 2 months of extra taxes and insurance. That’s why if you “zoom out” for a 90-day review it’s the same regardless if you refinance or not.
This is applicable if you are about to waive escrows on the new loan AND you currently have an escrow account. First, you will receive the refund for your current escrow account after your loans closes and funds. Second, you may owe some insurance at closing if your insurance is renewing within the next 6 months. See the section below titled “Insurance May Be Collected” for more details.
Insurance May Be Collected
Depending on how you pay for your homeowner’s insurance and when it renews, you may be required to pay 4 to 6 months of insurance in advance at closing – even if you’re waiving escrows. Mortgage servicers want to know that your insurance is paid 90 days beyond the date of your first payment to ensure you’re covered during the initial setup period of your loan. If your insurance is prepaid beyond 6 months of the closing date then you will not owe any money at closing for your insurance (and you can stop reading).
Because the amount collected is paid directly to your insurance provider at closing, you won’t owe your insurance company a payment for a handful of months. From a “zoom out” perspective your out of pocket costs is the same whether you refinance or not since you’ll be paying for your insurance regardless.
Example: if you fund your refinance on June 5 and currently pay your insurance monthly, you may be required to pay 5 months of insurance in advance at closing to ensure that the insurance is paid through October (since your first payment is due August 1st). Because this money is paid directly to your insurance provider at closing you won’t owe your insurance company another payment until November.
Obviously you’re welcome to call us if you want to discuss your loan specifics.