What your escrow account does
Many mortgages include an escrow account. Part of your monthly payment goes into it, and your servicer uses it to pay your property taxes and homeowners insurance when they come due. Servicers usually keep a small cushion in the account, so there's often money left when you sell.
What happens at closing
At closing, the settlement agent pays off your mortgage from the sale proceeds. The payoff covers your loan balance and interest, not your escrow account. Once the loan is paid, your servicer closes the escrow account.
Your escrow balance doesn't usually reduce your payoff at closing. It comes back to you separately.
Your escrow refund
After payoff, your servicer refunds the remaining escrow balance to you. Federal rules generally require this within 30 days of payoff, not counting weekends and federal holidays, and many refunds arrive sooner. It usually comes as a check mailed to the address you give the servicer, so update your mailing address before you move.
Because it's your own money being returned, an escrow refund isn't usually taxable income.
How property tax prorations work
Property taxes are split between you and the buyer based on the closing date. If taxes for the period have already been paid, you may get a credit from the buyer. If they're paid later, in arrears, you may see a charge on your settlement statement for your share. How and when taxes are billed varies by state and locality.
- Taxes already paid ahead: you may get a credit
- Taxes paid in arrears: you may owe your share at closing
- Your settlement statement shows the exact amounts
Your homeowners insurance
Keep your policy active until the sale closes and the buyer owns the home. After closing, call your agent to cancel. If you paid the premium ahead, you may get a refund for the unused months, depending on your policy. If the servicer paid your premium from escrow, any refund from the insurer usually comes to you. Review your policy or talk with your agent.
Before you close
- Ask your servicer for a payoff statement
- Give your servicer your new mailing address
- Keep your last escrow statement to check the refund amount
- Review the tax prorations on your settlement statement
- Set a reminder to cancel your homeowners policy after closing
