After you purchase a home, your mortgage lender will establish an escrow account to pay for your taxes and homeowners’ insurance. Each month, your mortgage servicer takes a portion of your monthly mortgage payment and holds it in the escrow account until your tax and insurance payments are due. The amount required for escrow is a moving target because your tax bill and insurance premiums can change from year to year. Your servicer will determine your escrow payments for the next year based on what bills they paid the previous year. To ensure there is enough cash in escrow, most lenders require a minimum of 2 months’ worth of extra payments to be held in your account.

So, what happens when one spouse refinances the house due to divorce? The new lender will open a new escrow account and the existing escrow account will be closed and the escrowed funds will be returned to the mortgage holder. This is something often overlooked in the divorce decree. Let’s look at this example: Husband is the sole mortgage holder. Wife refinances the house and the existing escrow account is closed. Because Husband was the mortgage holder, the escrowed funds are returned to him. The problem is, is most cases the escrowed funds for taxes and insurance were paid with marital funds and that can be a large sum of money!

Working with a CDFA can help you avoid those types of financial errors.