When refinancing a mortgage, many borrowers prefer to close with as little money “out of pocket” as possible. Borrowers who are refinancing an existing Northstar Funding loan to a new one with Northstar Funding may qualify to use the funds in an existing escrow account and apply them to the new mortgage. This procedure is net escrow.
Benefits of netting escrow
Netting a borrower’s escrow during refinancing can make the process quicker. Instead of paying the new escrow amount out of pocket, a borrower can net, or apply the escrow balance from the original loan, using these funds to cover the difference for the new escrow account.
Depending on the available balance, netting escrow will either decrease or eliminate a borrower’s need to produce cash for setting up a new escrow account.
Why Don’t More Clients Net Escrows?
If the new loan has different terms than the existing one, this can confuse borrowers. For example, if an old escrow account had a $2,000 balance and the refinanced escrow required $3,500, borrowers would still need to bring $1,500 to closing if it’s not added to the refinanced loan amount.
Also, net escrow discounts do not occur until a payoff is ordered, so it’s usually the last thing to happen when closing a refi. Also, a reimbursement check may be more appealing in a short-term sense.
This chart uses the hypothetical example of having a principal balance of $120,000, a refinanced escrow of $3,500, and an “old” escrow of $2,500.
|WITH NET ESCROW||WITHOUT NET ESCROW|
|$120,000 principal balance||$120,000 principal balance|
|– $2,500 net escrow balance||+ $3,500 for new escrow|
|+ $3,500 for new escrow|
|= $121,000||= $123,500|
|The first payment of a refinance is always skipped, but if $1,000 is brought to closing, the principal balance can be lowered to $120,000.||The remaining escrow balance is reimbursed to the borrower, but the larger principal balance may be more than anticipated.|
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