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Why is my current escrow balance added to my new refi balance?

Hi all,
I'm mulling over a potential refi and am hoping to get some clarification on an issue regarding a higher quoted balance. Some quick background info on my existing loan: I am 3 years into a 30 yr fixed mortgage (original amt = ~250k) and have an escrow account funded by a portion of my monthly payment and utilized to cover the annual county tax and homeowners insurance premium.

The refi GFE provided by the agent shows a new 30 yr mortgage w/ a lower rate, an obligation to establish a new escrow account, and a higher balance than my current unpaid principal balance  (UPB). When questioned about the components of the balance increase, the agent explained that it is comprised of the current UPB, daily interest, and fees (all three aforementioned items summing up to the Payoff amount provided by my current lender, which I have verified), as well as the existing escrow balance. The escrow piece is where my confusion lies - why would the balance of my escrow account, which is essentially an asset since I have funded it from a portion of my own monthly payments, now contribute to my debt, since it has been added to my new UPB that I am obligated to pay to the lender? My understanding of the escrow process involved in a refi is that my current lender will write me a check for the contents of my escrow account. I could then use those monies to fund the new escrow account established with the new lender. I don't see how this amount would contribute to adding to the balance of the new refi loan.


I would appreciate thoughts from anyone experienced with this topic. Thanks!
  • November 12 2012 - US
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Answers (3)

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Thank you for the responses. Just for edification purposes, as a practice why is the current escrow balance added to the refi balance? In that sense, it accrues interest that the borrower is obligated to pay. I would have thought that the annual escrow would just be baked into the monthly PITI.  By incrementing the UPB by the escrow balance, it seems the lender is benefitting from the interest earned on that amount without extending any extra benefit to the borrower for doing so.
  • November 12 2012
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If you have the money then I would come to the table with the amount needed to fund your escrow account.  You will be writing a check for the escrows knowing that your current escrow balance will be refunded once your current lender is paid off.

  • November 12 2012
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You will receive a refund of your existing escrow account about 3-4 weeks after you close. You can lower the loan amount on the new loan by the refund amount and pay it at closing if you wish. If you do not have that much money to bring to closing then you can also send it back to the new lender as additional principal once you receive it.  
  • November 12 2012
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