||Ask Dr. Don
Escrow accounts and refinancing
Dear Dr. Don,
I bought a house recently and want to refinance to take advantage
of the lower rates.
At the closing, the sellers had
some money held over from them toward their taxes, and portions
of my payments are kept in an escrow account. How are the escrow
accounts for my property tax and homeowners insurance handled when
I've read all about closing costs and total costs,
but I can't find any information on this subject. Do I have to pay
in advance for my property taxes again and get a refund from my
old mortgage holder? Also, I have a second mortgage on the house
(to avoid PMI). Can I refinance the second mortgage as well?
The holder of the second mortgage is unwilling to be made any worse
off by you refinancing your first mortgage. That means that your
new first mortgage can't be any larger than the outstanding loan
balance on the existing first mortgage, and the second will have
to sign off on the refinancing.
No one likes paying private mortgage insurance, but
or similar financing structure won't always be less expensive than
rolling the two loans into a new first mortgage. It depends on the
rate differential between the first and second mortgage, your home's
appraised value and the size of your down payment. PMI isn't forever,
it just seems that way.
I don't know how recently you financed your current
loans, so make sure that there aren't any repayment penalties on
Unless you're refinancing with your current lender,
you'll have to come up with cash at closing to fund the escrow account
for property taxes and insurance. You'll get your money refunded
from the old escrow account. The refund check should approximate
the amount that was required at closing.
Take out a short-term loan if you need to, but try
to avoid capitalizing (borrowing) these costs in the new loan amount.
If you do capitalize these costs, use the escrow refund check to
make an additional principal payment on the loan.
Read this Bankrate
feature to learn about proposed legislation that would require
the old lender to return your escrowed funds in seven to 21 days.
-- Posted: Aug. 5, 2002