Understanding Mortgage Escrow Accounts
A mortgage escrow account is essentially a separate account held by the lender to cover property related expenses such as property taxes and homeowners’ insurance. Homeowners contribute a portion of these expenses to the escrow account each month, along with their mortgage payment. The lender then uses the funds from the escrow account to pay these bills when they come due.
Divorcing couples often overlook the importance of the escrow account balance and its distribution, especially when the mortgage is paid off. An escrow account may hold several thousands of dollars depending on the time of year so the financial impact may be significant.
Disbursing the Escrow Balance in a Divorce Scenario
1. **Refinancing or Selling the Property:**
– Divorcing couples typically have several options regarding the marital home. They may decide to sell the property and divide the proceeds, or one party may choose to buy out the other’s share. Another option is refinancing the mortgage in the name of the spouse who will retain ownership.
2. **Distribution of Escrow Funds:**
– Regardless of option chosen, once the mortgage is paid off, any remaining balance in the escrow account becomes available for disbursement. In most cases the escrow balance will be refunded via a check made out all parties on the existing loan within 30 days of the loan payoff date.
However, the named recipient of the escrow balance may be adjusted via the agreements made during the divorce proceedings and the chosen course of action with the property.
– If the property is sold, the escrow balance may be included in the overall distribution of sale proceeds and split between the spouses or the escrow balance may be granted to just one spouse.
– In cases of refinancing, the spouse taking over the property may be granted the escrow funds or the funds may be split between the spouses. Keep in mind when refinancing the property, a new escrow account will be established with the new lender unless the escrow account is waived.
3. **Communication with the Lender:**
– If the mortgage loan to be paid off is in the name of both spouses and the escrow account is awarded to just one spouse then it will be important to communicate this to the mortgage lender. Inform them of the impending divorce and inquire about the specific procedures and requirements for handling the escrow balance.
4. **Legal Assistance:**
– Seeking legal advice is crucial during divorce proceedings, especially when dealing with complex financial matters. Consult with a family law attorney to ensure that the disbursement of the escrow balance aligns with the terms of your divorce settlement.