This post has been updated in 2026 to reflect current practices for Washington State refinances.
A common question I get from refinance clients: why does one lender’s Loan Estimate show more “reserves” due at closing than another lender’s estimate for the same loan? It usually isn’t that one lender is more expensive — it’s that one estimate is more accurate about timing.
What are escrow reserves?
On your Loan Estimate and Closing Disclosure, the section labeled “reserves” (sometimes called an initial escrow deposit or impound account) refers to funds your new lender collects upfront to seed the account that will later pay your property taxes and homeowners insurance as those bills come due. This also typically includes a small amount of prepaid interest.
This is a completely different thing from qualifying reserves — the liquid assets underwriters want documented to show you could cover your payment if your income stopped. Qualifying reserves are money you already have and simply verify; escrow reserves are money that changes hands at closing to fund an account your servicer will manage going forward.
Why estimates vary between lenders
Two lenders quoting the same refinance can show meaningfully different reserve amounts, and it’s rarely because one is wrong. A Loan Estimate is, by definition, an estimate — the actual reserve amount gets trued up at closing based on your real closing date, your county’s tax due dates, and your insurance policy’s renewal date.
A lender who doesn’t yet know your insurance renewal date or your exact closing date will often build in a cushion — erring toward a higher number of months of taxes and insurance — so you aren’t surprised by a bigger-than-expected number at the closing table. A lender working from thinner assumptions may show a lower number upfront that grows once the actual figures are known.
The amount of property tax reserve required is driven primarily by when your first payment on the new loan is due, and by your county’s property tax due dates. Homeowners insurance reserves depend on where your policy sits in its renewal cycle — if the lender doesn’t have your renewal date, it’s reasonable for them to assume a higher number of months rather than guess low.
Prepaid interest on a refinance
Mortgage interest is normally collected in arrears — you pay this month for last month’s use of the money. A refinance is the exception: at closing, you prepay interest for the remaining days left in the month your new loan closes.
This is why closing date matters for your bottom line. Closing near the end of the month means only a few days of prepaid interest. Closing mid-month can mean two weeks or more — often a noticeable chunk of a full mortgage payment. It isn’t an extra fee; it’s interest you’d owe either way, just collected at a different point than a purchase-money payment schedule.
What happens to your old escrow account
If your current mortgage has an escrow account, refinancing pays that loan off — and your existing servicer will refund the balance of that escrow account directly to you, typically within a few weeks after the old loan closes. Those funds can’t be transferred directly into the new loan’s escrow account; the new lender has to collect its own reserves to fund the new account, which is part of why this can feel like double-paying in the short term even though it isn’t.
The bottom line
A higher reserve estimate on a Loan Estimate isn’t necessarily a red flag — it can mean the lender is giving you a more realistic picture of what you’ll actually need at closing, rather than a number that looks better on paper but grows by the time you sign. If two estimates differ mainly in the reserves line, ask each lender what assumptions they used for your tax due date, insurance renewal, and closing date — that’s usually where the difference comes from, not the underlying cost of the loan itself.
👉 Read: Refinance Programs for Homes in Washington State
👉 Read: Mortgage Reserves: How Much You Need & Where They Come From
Last reviewed: July 2026
About Rhonda Porter
Hey Rhonda – thought it was interesting how different this issue is state to state. Unless the borrower is setting up impound accounts – there are several differences down here: unless we are in the month prior to property tax installments due date – no property taxes are collected at the close of a refinance. Homeowners insurance premium needs to have 4 months worth of the annual premium left after the close of escrow – but in some cases (cash out) the requirment is 12 months – otherwise the annual premium is collected at the close (or can be paid directly to the insur. agent). As for prepaid interest – I always find it helpful to explain ‘what the heck that means’ to my borrowers. Seems like some think ‘pre paid interest’ is an extra fee, rather then knowing that mortgage interest is ALWAYS collected in arrears – EXCEPT on a refinance – when the number of days remaining in the month the new mortgage closes in are collected up front (prepaid), and from that point on the interest is paid “after the money has been used”…which creates an impression that they are ‘skipping’ a payment. Such a complicatd issue for consumers – especially when it’s not standard in all states, and if they have an impound account, as in your blog examples. Thank you for putting such valuable consumer education out here!!
Cindi, proving once again WHY I stick to providing mortgages in Washington State only… I could never keep track of procedures in 49 other states. Thanks!
Cindi,
In a refi situation such as this one described, how are the impounds from the current mortgage being refinanced refunded back to the borrower?
Rap2321, I’ll see if I can track down Cindi to respond to your comment.
With what I’ve described in the main post, what happens most often is the lender that is being paid off will refund the balance of the reserve account to the borrower in a few weeks after closing.
Yes – in all states, if a mortgage loan is paid off (for any reason, including the sale of the property) and there was an impound account in place – the lender will refund the balance typically within 3 to 4 weeks. I’ve done mortgages in California and Georgia over the past 24 years, and have had clients in both areas transfered in from multiple states – have never seen a variation on this. So regardless of whether the new loan is going to have an impound account or not – if the old loan had one – 3 to 4 weeks AFTER old loan closed – money is refunded. ** Also – that old impound account can not be used to fund the new impound account – so Rhonda’s original post about gathering reserves has to happen to set up a new impound.